Singer Lounes Matoub was said to have been killed by "a terrorist group in Tizi Ouzou province" - the heart of the mountainous Kabylie region in north-eastern Algeria and the centre of supporters of the Berber language and culture.
French President Jacques Chirac paid tribute to Matoub, saying he had a very beautiful voice and he heard of his death "with dismay, and very deep sadness".
Thousands of people turned out in the streets to protest at his death.
Matoub, a staunch anti-Islamist, outspoken democrat and symbol of the Berber culture, was ambushed at Beni Douala, between Tizi Ouzou and his village of Taourirt Moussa, about 25km (15 miles) from the provincial capital.
"He was in his car and was heading for his village when he was caught at a fake roadblock," one witness said.
The Algerian news agency APS said the singer was accompanied by his wife, who was wounded in the attack but whose life is not in danger.
Algerian MP Nordin Ait Hamouda told French television station LCI that Matoub was killed as he drove back from lunch in a restaurant with his wife and two sisters-in-law.
"The GIA [Armed Islamic Group] knows his car and knows him. I suppose that the GIA saw his car come into town and set up an ambush," said Mr Ait Hamouda, a deputy for the Rally for Culture and Democracy (RCD).
Thousands of people had gathered outside Tizi Ouzou hospital and angry protesters were demonstrating in the town against the killing, Mr Hamouda said.
Matoub, 42, had been kidnapped by the GIA in late 1994 but was released more than two weeks later after a threat by the Berber Cultural Movement to wage war on Islamic militants if he was not freed.
Since the kidnap he had lived mostly in France, returning periodically to Algeria.
Several musicians, a score of singers, and people working in theatre have been killed during Algeria's six-year-long conflict.
Matoub's killing came hours after 17 people were slaughtered in a hamlet in Saida province, 325km south-west of Algiers. Five people werewounded.
It was the third massacre in just over one week and brings to at least 260 the number of Algerians who have died in the past few weeks, according to reports by security forces and newspapers.Reuse content