The League One club have confirmed the 60-year-old former Aston Villa boss will undergo heart surgery in the early new year and requires a lengthy period of recovery.
Saunders, who was last in work as manager of Wolves, will step in and be in charge of Sunday's clash with Colchester.
A club statement read: " Crawley Town can confirm that team manager John Gregory is stepping down from his position with immediate effect
"John will be undergoing a major open-heart surgery operation at the beginning of January and afterwards will need a lengthy period of recuperation
This operation needs to be done as soon as possible but is not stress-related.
"The club have appointed Dean Saunders as interim team manager
Dean will be responsible for every aspect of the playing side including coaching, player recruitment and scouting.
"After an illustrious 19-year playing career Dean had spells as assistant manager at Blackburn, Newcastle and with the Welsh national team
He was in charge for three years at Wrexham before spells at Doncaster Rovers and Wolves.
"The club would urge all our supporters to get behind Dean, starting on Sunday when he will take charge of the team for the home game against Colchester United."
Saunders takes over with the Red Devils in the relegation zone in League One following Boxing Day's 4-1 defeat at fellow strugglers Leyton Orient.
Source : PA
Source: PA