The American was sacked by the Yorkshire club two weeks ago after enduring a poor run of form, including no win in seven Premier League matches, leaving the Whites in 17th and outside the relegation zone on goal difference.
Michael Skubala has taken interim charge while the club looked to appoint a permanent manager to aid their survival bid, but Leeds suffered setbacks in their search.
Andoni Iraola, Alfred Schreuder, Carlos Corberan and Arne Slot were all considered but Leeds are now set to turn to a short-term option in Gracia - who kept Watford up in the 2017/18 season and took the club to the FA Cup final in 2019 before he was sacked just a few months later.
Leeds spent almost £37 million last month, with Georginio Rutter and Maximilian Wober signing permanently and Weston McKennie signing on loan from Juventus.
A Leeds statement read: “Leeds United can confirm head coach Jesse Marsch has been relieved of his duties. Jesse joined the club in February 2022 and was instrumental in keeping the club in the Premier League on the final day of last season.
“Rene Maric, Cameron Toshack and Pierre Barrieu will also leave the club. We would like to thank Jesse and his backroom staff for their efforts and wish them well for the future.
“The process of appointing a new head coach is underway and we will continue to keep supporters up to date throughout the coming days.”
Here are the latest odds from the bookmakers to be the new boss at Elland Road.
Next Leeds manager odds
Odds via Oddschecker
Javi Gracia: 1/20
Rafael Benitez: 12/1
Michael Skubala: 14/1
Nuno Espirito Santo: 20/1
Andoni Iraola: 25/1
Alfred Schreuder: 25/1