There have been persistent reports for several days that Gen Kelly was under pressure to go.
Some reports said that the retired Marine Corps general’s relationship with Mr Trump had deteriorated.
But Mr Trump described Mr Kelly as a “great guy” and said a replacement would be named “over the next day or two”.The White House revolving door: Who’s gone?
The people around Donald Trump “He’s been with me almost two years now, between two positions,” Mr Trump said. “I appreciate his service very much.”
The body count rises
Analysis by Anthony Zurcher, BBC North America correspondent
John Kelly came into the job promising to bring military discipline to an administration riddled with leaks and palace intrigue. He can claim some success – but the leaks never completely disappeared and, by the end, the chief of staff was as deep into the back-stabbing and personnel drama as anyone.
A White House job is never easy, but this administration has chewed through senior staff at a record pace. Donald Trump is on his third national security adviser, fifth communications director and soon to be third chief of staff.
The one constant is the man in the Oval Office. He likes to say his administration operates like a well-oiled machine, but the grinding gears are amassing quite a professional body count.
In total, 28 people have resigned or been fired from the White House during Mr Trump’s administration.
Last month Reuters news agency quoted a source as saying that Vice-President Mike Pence’s chief of staff Nick Ayers was a possible contender for the chief of staff role.
Earlier this year Gen Kelly was forced to deny that he had called Mr Trump an “idiot” after the quote was included in a book about Mr Trump by the veteran investigative journalist Bob Woodward.
Gen Kelly is said to have used the description repeatedly and also allegedly said that “it’s pointless to try to convince him of anything”. Woodward on Trump – the explosive quotes “Why the Woodward effect damages Trump”
Mr Trump initially nominated Gen Kelly to oversee Homeland Security before promoting him to chief of staff last July, replacing Reince Priebus.
On Saturday, the president also announced that his highest-ranking military officer, Gen Joe Dunford, would be retiring as chairman of the Joint Chiefs of Staff.
He tweeted to say Gen Mark Milley, the current Chief of Staff of the US Army, would replace Gen Dunford.