Legal notices filed by a police desk clerk with whom Foxworth had an affair before he became chief sparked a sex scandal and three-month investigation.
Potter said during a news conference Friday that most of the allegations against Foxworth were not substantiated by the investigation, but that Foxworth had used poor judgment in sharing department information with the woman.
"Men and women of the Portland Police Bureau and members of the public look to their chief to set the tone for acceptable conduct," said Potter, himself a former Portland police chief.
"I do not believe Chief Foxworth's example meets the standard that I as the police commissioner expect of the chief of police. I have concluded Derrick Foxworth's ability to lead the organization effectively as chief has been damaged," he said.
Acting police chief Rosie Sizer will serve as interim chief.
The investigation conclusions:
Eight allegations of misconduct were investigated, and a report released Friday showed investigators found Foxworth guilty of only one infraction: "Unprofessional conduct." The investigation concluded that he improperly passed along unsubstantiated rumors about others in the police bureau.
Investigators said they found no evidence to support several of the claims against Foxworth, including improper use of city property, being impaired on duty, differential treatment of Oswalt or professional misconduct.
Some of Foxworth's e-mails were made public. But the report said investigators did not have access to any Oswalt may have written to him, so the investigators could not conclude that Foxworth sexually harassed Oswalt.
The report also found no indication that he used a job threat to pressure Oswalt to keep the affair quiet.
The report concluded that Foxworth used a personal cell phone and personal e-mail account to correspond with the clerk, Angela Oswalt, and that the contact with Oswalt took place during a time when the two had a personal, consensual sexual relationship.
However, the report also said Foxworth's decision as a high-ranking member of the Police Bureau to send sexually explicit e-mails to Oswalt "constituted a serious lapse of judgment."
Anna Kanwit, deputy director of the city's Bureau of Human Resources, said Foxworth was interviewed three times and Oswalt twice during the investigation.
The executive summary said Oswalt did not come in for an interview until she had been asked repeatedly to do so. Oswalt, through her attorney Victor Calzaretta, had filed notice of a possible lawsuit with the city. But Portland's human resources director, Yvonne Deckard, said Friday the only negotiations in progress involved city job possibilities for Oswalt, who also has been on leave.
Foxworth has acknowledged a "brief and intense affair" with Oswalt before he became police chief in 2003. But he has insisted through his lawyer that the relationship didn't violate city policies because it was conducted off-duty and didn't interfere with operations of the police department.
In April, Foxworth was placed on paid administrative leave pending the investigation. He had headed the Portland Police Bureau since 2003.
Potter said Foxworth will return to duty in July.
(The Associated Press also contributed to this article.)