Rebels loyal to sacked vice president Riek Machar seized the oil hub of Bentiu last week. The UN says they hunted down civilians sheltering in mosques, churches and a hospital, in a wave of ethnic killings.
The president gave no reason for removing general James Hoth Mai, a move announced on national television, but sources attributed the decision to recent military setbacks in the oil-rich north of the country. His successor was named as general Paul Malong.
The conflict in South Sudan, which won independence from Sudan in 2011 and is the world's youngest nation, has left thousands dead and forced around a million people to flee their homes.
The insurgents recently launched a renewed offensive targeting the key oil fields and Bentiu is the first major settlement they have retaken.
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"We are horrified by reports out of South Sudan that fighters aligned with rebel leader Riek Machar massacred hundreds of innocent civilians last week in Bentiu," White House spokesman Jay Carney said.
"The government forces and their allies committed these heinous crimes while retreating," rebel spokesman Lul Ruai Koang said, adding that the rebel offensive targeting oil fields and the town of Bor, situated north of the capital Juba, was continuing.
The scale of killings in Bentiu is one of the worst atrocities in the four-month conflict, during which both sides have been implicated in massacres, rape and the recruitment of child soldiers.
"The Bor and Bentiu attacks should be a wake-up call and commanders and leaders responsible for abuses on both sides have been let off the hook for too long," said Daniel Bekele, Africa director at Human Rights Watch.