In 1774, their relationship took on a more intimate character. Potyomkin became a favorite of the tsarina; he received many awards, and was given the highest posts. For the next 17 years, he was the most powerful man in Russia. Potyomkin found pleasure in ostentatious luxury and personal wealth. Like Catherine, he gave in to the temptation of absolute power; however, in many dealings, he was guided by the spirit of Enlightenment. He showed tolerance of religious differences, and gave protection to national minorities. As commander-in-chief of the Russian army (nominally from 1784), he espoused a more humane type of discipline, demanding that officers take care of soldiers in a paternal way.

In 1776, at Catherine's request, Emperor Joseph II raised Potyomkin to the rank of a prince of the Holy Roman Empire. In 1775, he was superseded in the empress's graces by Zavadovsky, but the relationship between Catherine and her former lover continued to be most friendly, and his influence with her was never seriously disturbed by any of her subsequent favorites. Based on contemporary rumors it is sometimes suggested that Catherine and Potyomkin contracted a secret marriage at some point during this time, though this has been neither proven nor disproven. In any case, there is much evidence of his enormous and extraordinary influence over the Empress during the next ten years. His correspondence with her was uninterrupted, and the most important state documents passed through his hands.

Potyomkin achieved appreciable success in Russia's newly won southern provinces, in which he was an absolute ruler. He supported a stream of both Russian and foreign colonists, he founded some new cities, and created the Black Sea Fleet. In 1783 he carried out the project of annexing Crimea to Russia, for which he received the victory title of His Serene Highness Knyaz Tavrichesky (Светлейший князь Таврический), or prince of Tauris, after an ancient name for Crimea. Four years later he organized Catherine's widely advertised ceremonial travel with her retinues to the southern provinces. The purpose of the trip was the intimidation of Russia's enemies, and it led to a war for which the country appeared poorly prepared (Russo-Turkish War, 1787 - 1792). As commander, Potyomkin was guided by a cautious strategy that was militarily justified but did not win him popularity. When he was commanding Russian troops in the six-month long Siege of Ochakov, he faced the opposition of general Alexander Suvorov, who called for immediate action.

His colonizing system was exposed to very severe criticism, yet it is impossible to not admire the results of his stupendous activity. The arsenal of Kherson, begun in 1778, the harbour of Sevastopol and the new fleet of fifteen ships-of-the-line and twenty five smaller vessels, were monuments of his genius. But there was exaggeration in all he attempted. He spared neither men, money, nor himself in attempting to carry out his gigantic scheme for the colonization of the south Ukrainian steppes; but he never calculated the cost, and more than three quarters of the design had to be abandoned merely half finished.

In 1790 he conducted the military operations on the Dniester and held his court at Iaşi in a lavish manner. In 1791 he returned to St. Petersburg where, along with his friend Bezborodko, he made vain efforts to overthrow the new favourite, Prince Platon Zubov, and in four months spent 850,000 rubles in banquets and entertainments at the Tauride Palace, a sum subsequently reimbursed to him from the treasury. Then the empress grew impatient and compelled him (1791) to return to Iaşi to conduct the peace negotiations as chief Russian plenipotentiary.

Near the end of his life, it became apparent he was suffering from a mental disorder, probably due to complications following an STD. This behavior included a series of violent assaults on the members of his staff and public declarations that he intended to conquer Poland, Turkey and Egypt. On October 5, 1791, while on his way to Nikolayev, he died in the open steppe, 40 miles from Iaşi, in consequence of eating a whole goose while in a high state of fever. Polish historian Jerzy Łojek notes that his death might have been a result of a poison, as his continuing madness made him a liability to the Russian court.

Potemkin's tomb in the Kherson Cathedral was opened by the Bolsheviks in the 1930s. His death was lamented in Derzhavin's great ode Waterfall.