Unseld was moved to a front office advisory role but Wizards president Michael Winger said the 7-36 club needed to make a switch after losing five games in a row and nine of its past 10 starts.
"After several thoughtful conversations with Wes, we determined together that a change was needed for the benefit of the team," Winger said.
"His vast basketball experience will be an asset to the front office as we progress toward our long-term goals."
Unseld's final game as coach was a 118-107 home loss to Minnesota on Wednesday while Keefe's debut comes Thursday when the Utah Jazz visit Washington.
Unseld is the 48-year-old son of former NBA Most Valuable Player and Washington legend Wes Unseld Sr., a Hall of Fame centre who sparked the team to its only NBA title in 1978 - when they were known as the Bullets - and later served as a head coach, general manager and vice president.
Unseld Jr. went 77-130 in 2.5 seasons coaching the Wizards since taking over in July 2021.
"I am grateful to have served as head coach of the Washington Wizards," Unseld Jr. said.
"I look forward to this new opportunity to work toward our organization's continued progress."
The Wizards, with the second-worst record in the NBA this season, missed the playoffs after going 35-47 in each of Unseld Jr.'s two seasons in charge.
They haven't had a winning season since 2017/18 and have not advanced beyond the second round of the NBA playoffs since 1979.
Keefe began his NBA career as a video coordinator for the San Antonio Spurs, helping the team's 2007 title run before becoming an assistant coach at Oklahoma City.
He also served as an assistant coach for the New York Knicks, Los Angeles Lakers and Brooklyn Nets before joining the Wizards' staff last July.
The Wizards said they will undertake a comprehensive search for a new head coach in the off-season.
