Priebus is the fifth top Trump administration official to be either sacked or to have resigned in the past six months. Trump has previously lost a deputy chief of staff, national security adviser, communications director and press secretary.
Priebus's exit comes nearly a week after press secretary Sean Spicer quit the White House, apparently unhappy over the appointment of Anthony Scaramucci as communications director.
Priebus previously served as the chairman of the Republican National Committee.
Trump tweeted the change after he returned to Washington from New York yesterday.
"I am pleased to inform you that I have just named General/Secretary John F Kelly as White House Chief of Staff," he said. "He is a Great American and a Great Leader. John has also done a spectacular job at Homeland Security. He has been a true star of my Administration."
Kelly previously served as the Commander of the US Southern Command and was the commanding general of the Multi- National Force-West in Iraq for an year from February 2008.
Over the past a few weeks, Trump expressed frustration over leaks coming out of his White House. With a retired general in charge, he hopes to bring in discipline and end the chaos inside the White House.
White House Press Secretary Sarah Sanders said in a statement that Kelly would begin his new role on Monday.
"General John Kelly is one of the true stars of the administration. He has helped seal the border and reduced illegal immigration by 70 per cent," she said.
Trump also thanked Priebus for his service.
"We accomplished a lot together and I am proud of him!" he tweeted.
Priebus said in a statement that it was one of the greatest honours of his life to serve the US president and the country.
"I will continue to serve as a strong supporter of the president's agenda and policies," he said. "I can't think of a better person than Gen John Kelly to succeed me and I wish him God's blessings and great success."
But Congressman Peter King, who accompanied Trump aboard the Air Force One to New York and back, told reporters that he saw no indication of Priebus' exit during the flight.
"We didn't even know it. We were sitting right across from him and he kept a poker face," King said, referring to Priebus.
King said Trump told him about the change as they were about to get off the flight. Asked what Priebus said during the flight, King repeated: "Good poker face, showed nothing".
"You accomplish great things everyday
defending our nation and I know your exceptional work will continue," Kelly said.
Disclaimer: No Business Standard Journalist was involved in creation of this content
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