Sherwin-Williams Co. has fired the president of its Gray Drug Stores division, which includes the Drug Fair chain, amid industry reports that Gray's performance has been disappointing since it was acquired three months ago.

A spokesman for Sherwin-Williams denied, however, that the Cleveland-based paint and chemicals manufacturer plans to spin off the Gray division, which it acquired for $55 million in September.

The spokesman said yesterday that Frederick W. Barney, former president and general manager of the Gray Drug division, had resigned last week. Barney will be succeeded by Alvin Towle, the former president of Shoppers Drug Mart, a division of Koffler Stores of Ontario.

Towle was senior vice president in charge of marketing at Peoples Drug Stores Inc. of Alexandria before being named president of Shoppers Mart two years ago. He will report to Carl Bellini, a group vice president at Sherwin-Williams.

John G. Breen, Sherwin-Williams' chairman and chief executive officer refused to comment yesterday on Barney's dismissal.

However, industry sources said Sherwin-Williams was unhappy with the drug store division's performance after Gray acquired Washington-based Drug Fair Inc. last summer.

Gray, which had been a Cleveland-based drug chain, bought Drug Fair for about $34 million and promised a major expansion program.

But several sources within the chain drug industry agreed yesterday that Gray officials made some unwise decisions in the interim.

"The organization has deteriorated in a short time," said one drug store industry official. "They're going to have to restructure. They're going to have to regroup."

The same official said he's confident Sherwin-Williams will hold on to its drug store division. "They didn't buy Gray to liquidate it," he said. What's more, he said, the Drug Fair units and their location in a major market are important to Sherwin-Williams' strategy for its retail operations.

Knowledgable sources within the industry say former Gray executives made a critical mistake in firing top Drug Fair executives when Gray acquired the local chain.