Keir Starmer thanked Ms Gray for ‘all the support she has given me, both in Opposition and Government’.
There have been reports of tensions in Number 10 involving Ms Gray, including between her and Keir Starmer’s chief adviser, Morgan McSweeney, who will succeed her in the role.
Cork man Morgan McSweeney was a key figure in Labour’s comeback from its worst post-war performance just five years ago.
The campaign guru is one of the most influential people in UK politics and will now become one of the most powerful people in government.
The 47-year-old Corkman has written the handbook on taking on the far right in British politics and was instrumental in taking back control from the hard left in his own party.
In a statement on Sunday, Ms Gray said she was “pleased to have accepted a new role as the prime minister’s envoy for the regions and nations”.
Mr Starmer thanked Ms Gray for “all the support she has given me, both in opposition and government, and her work to prepare us for government and get us started on our programme of change.
“Sue has played a vital role in strengthening our relations with the regions and nations. I am delighted that she will continue to support that work.”
In a statement, she said: “It has been an honour to take on the role of chief of staff, and to play my part in the delivery of a Labour Government.
“Throughout my career my first interest has always been public service.
“However, in recent weeks it has become clear to me that intense commentary around my position risked becoming a distraction to the government’s vital work of change.
“It is for that reason I have chosen to stand aside, and I look forward to continuing to support the prime minister in my new role.”
Last month, it was leaked to the BBC that Ms Gray was earning more than the prime minister, amid a series of briefings against her as chief of staff.
The broadcaster was told that Ms Gray was earning £170,000, which would put her on £3,000 more than Mr Starmer.
When asked last month to comment on the rumoured infighting between Ms Gray and colleagues including Mr McSweeney, Mr Starmer refused.
He said in September: “I’m not discussing individual members of staff. I wouldn’t do that in relation to any member of staff, I’m not going to break that rule. That’s not a new rule for me. It’s a rule I had in opposition. It’s a rule I had when I was director of public prosecutions, when we, from time to time, had interest in senior staff.
“I think that I owe it to all staff to respect and protect them, and that means I will never discuss them in a session like this.”
Alongside Ms Gray’s departure, five changes to the Downing Street operation were announced, including the appointment of Mr McSweeney as chief of staff.
Political director at Number 10 Vidhya Alakeson and director of government relations Jill Cuthbertson have been promoted to deputy chiefs of staff.
Nin Pandit, director of the Downing Street Policy Unit, has been appointed Parliamentary Private Secretary to the PM, and former journalist James Lyons will join to head up a new strategic communications team, Downing Street said.
The reshuffle comes less than 100 days since Keir Starmer walked into Downing Street as prime minister, and the Conservatives have described the situation as “chaos”.
A Tory Party spokesman said: “In fewer than 100 days Keir Starmer’s Labour Government has been thrown into chaos – he has lost his chief of staff who has been at the centre of the scandal the Labour Party has been engulfed by.
“Sue Gray was brought in to deliver a programme for government and all we’ve seen in that time is a government of self-service.
