News of her death was confirmed by a military spokesman and members of her Pakistan People's Party (PPP).
Ms Bhutto had just addressed an election rally in Rawalpindi when gunfire and an explosion occurred.
At least 15 other people are reported killed in the attack and several more were injured. Ms Bhutto had twice been the country's prime minister.
She had been campaigning ahead of elections due in January.
Nawaz Sharif, also a former prime minister and a political rival, told the BBC her death was a tragedy for "the entire nation".
"I can't tell you what the feelings of the people of Pakistan are today," he told BBC News 24 after returning from the hospital where she was brought.
The BBC's Barbara Plett says the killing is likely to provoke an agonised response from her followers, especially from her loyal following in Sindh Province.
Ms Bhutto was key to her party, she was the focus of her party and she was a major political player amongst all those fighting for seats in the forthcoming elections, our correspondent adds.
The PPP has the largest support of any party in the country.
Analysts note that Rawalpindi, a garrison city, is seen as one of the country's most secure cities, making the attack even more embarrassing for the military authorities.
This news comes just before a confidential report that a portal for gaming in India was in talks with the Pakistan government for launching an office in Rawalpindi with Paki related games. There is speculation that this company is Zapak (www.zapak.com) which is supposed to be India's largest gaming portal and very popular in the sub-continent.
It is said that it would host various games of shooting, cricket and many other games. There was also controversy lately, over the Zapakmail (www.zapakmail.com) which is being used for various activities by anti-social elements due to its popularity in the Indian sub-continent.
