Gruesome images of a blood-stained man thought to be Gaddafi being dragged through the streets of Sirte were shown on Libyan television. Some of the images suggested he was alive when captured.
It is understood that his body was later moved to a mosque in the town of Misrata, scene of some of the fiercest fighting earlier in the rebellion which ousted him from power.
US President Barack Obama said it was a "momentous day" in the history of Libya but warned there will be "difficult days ahead" on the road to full democracy in the country.
Mr Obama also urged the Libyan people to respect the human rights of those they had detained.
He said the Nato mission in Libya will soon come to an end.
"This marks the end of a long and painful chapter for the people of Libya who now have the opportunity to determine their own destiny in a new and democratic Libya," he said.
"For four decades the Gaddafi regime ruled the Libyan people with an iron fist.
"Basic human rights were denied, innocent civilians were detained, beaten and killed and Libya's wealth was squandered, enormous potential of Libyan people was held back and terror was used as a political weapon.
"Today we can definitively say that the Gaddafi regime has come to an end.
"This is a momentous day in the history of Libya.
"The dark shadow of tyranny has been lifted and with this enormous promise the Libyan people now have a great responsibility to build an inclusive and tolerant and democratic Libya that stands as the ultimate rebuke to Gaddafi's dictatorship.
"We call on our Libya friends to continue to work with the international community to secure dangerous materials and to respect the human rights of all Libyans, including those who have been detained.
"We are under no illusions. Libya will travel a long and winding road to full democracy. There will be difficult days ahead. But the United States, together with the international community, is committed to the Libyan people."
Gaddafi's death was announced by the Prime Minister of the country's National Transitional Council (NTC) government Mahmoud Jibril, who told a press conference in capital Tripoli: "We have been waiting for this moment for a long time. Muammar Gaddafi has been killed."
In London, David Cameron said it was a moment to remember his many victims, including those who died when Pan-Am flight 103 was blown up over Lockerbie in 1988, Wpc Yvonne Fletcher, who was gunned down outside the Libyan embassy in 1984, and those killed by the IRA using Semtex explosives supplied by Gaddafi
In a statement notably free of any hint of triumphalism, the Prime Minister said he was "proud" of the role Britain played in helping the Libyan people liberate their country.
Speaking outside 10 Downing Street minutes after Mr Jibril confirmed Gaddafi's death, Mr Cameron said: "People in Libya today have an even greater chance, after this news, of building themselves a strong and democratic future.
"I'm proud of the role that Britain has played in helping them to bring that about and I pay tribute to the bravery of the Libyans who have helped to liberate their country.
"We will help them, we will work with them, and that is what I want to say today."
United Nations Secretary General Ban Ki-moon said today marked "an historic transition for Libya" and called on combatants on all sides to lay down their arms.
The European Union called for the NTC to pursue "a broad-based reconciliation process which reaches out to all Libyans and enables a democratic, peaceful and transparent transition".
NTC officials said that Gaddafi died when he was shot in the head and legs after trying to flee Sirte in a convoy which was targeted by Nato warplanes.
However the precise details of how he met his death remained shrouded in uncertainty.
There were reports that the 69-year-old, who ruled Libya as his personal fiefdom for more than four decades, may have been found cowering in a concrete pipe and begged not to be shot when found by NTC troops.
The Ministry of Defence confirmed that Nato warplanes this morning attacked a convoy fleeing Sirte, though it is not known whether Gaddafi was in any of the vehicles.
"It was targeted on the basis that this was the last of the pro-Gaddafi forces fleeing Sirte," a spokesman said.
RAF fighters were not involved in the attack, although RAF reconnaissance aircraft were in the area.
Britain has played a prominent role in the Nato-led international military effort to protect Libyan civilians under the terms of a UN resolution passed in March, following the outbreak of the uprising against Gaddafi the month before.
But Downing Street played down any suggestion of UK military involvement in the fugitive dictator's death.
There were scenes of wild jubilation in Sirte, which had been under siege for the past two months as final pockets of Gaddafi loyalists held out against the NTC forces.
The end came in a couple of hours of fierce gun battles believed to have left many Gaddafi fighters dead, possibly including the head of the former regime's armed forces, Abu Bakr Younus Jabr.
Gaddafi's son and anointed heir Saif al-Islam was reported to have escaped Sirte into the desert. Mr Jibril said a convoy believed to be carrying Saif has come under attack from NTC forces.
In London, Libyan expatriates gathered outside their country's embassy to celebrate.
Charge d'affaires Mahmud Nacua hailed "a glorious and momentous victory against the tyranny of Muammar Gaddafi, his sons and cronies".
"The Libyan freedom fighters have finally succeeded in drawing the curtain on Gaddafi crimes," said Mr Nacua.
"Their brave actions have spared Libya and the world from any further suffering of his evils. Today Libya's future begins. Gaddafi's black era has come to an end forever."
Labour leader Ed Miliband said: "I pay tribute to the Libyan people for standing up to the former regime and seeking to define their own democratic destiny. We should be proud of the support that our armed forces have given to that cause.
"Britain should stand ready to continue to help the National Transitional Council as it seeks to improve economic and social conditions, ensure order and prepare for elections."
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