She had just addressed a campaign rally for the parliamentary vote when an attacker shot her in the neck before blowing himself up at a park in the northern city of Rawalpindi, killing her and at least 16 others, police said.
President Pervez Musharraf called on the country to stay peaceful "so that the evil designs of terrorists can be defeated," state television reported.
It said he chaired an emergency meeting with top officials "to consider all aspects of the tragic national incident."
There was no claim of responsibility for the attack, but Bhutto had accused elements in the intelligence services of trying to kill her. She also said she had received death threats from Islamic militant groups including al-Qaida.
Police officials said Bhutto succumbed to her injuries in hospital, but it was not immediately known if it was the gunshot wound that killed her.
"The attacker fired and then blew himself up," said one official, who asked not to be named.
"She was waving to the crowd from the sunroof of her car and then there was a blast," Bhutto spokesman Farhatullah Babar told state television.
He said doctors declared her dead at 5:25 pm (1225 GMT).
It was the second suicide attack targeting Bhutto since she returned from eight years of exile in October aiming to contest the elections, and came amid an unprecedented wave of violence blamed on Islamic extremists linked to al-Qaida.
The attack calls into question whether the January 8 election can be held safely and on schedule, and may also trigger speculation on whether Musharraf will re-impose a state of emergency he lifted earlier this month.
Bhutto, 54 and educated at Oxford and Harvard, became the first ever female prime minister of a Muslim country when she took the helm in Pakistan for the first time in 1988.
World leaders swiftly condemned what neighbor India called an "abominable act," with the United States -- which sees nuclear-armed Pakistan as a crucial ally in its "war on terror" -- expressing its concern.
"We condemn the acts of violence which took place today in Pakistan," said White House spokesman Scott Stanzel, adding that U.S. President George W. Bush would make a statement later.
As they spoke, police used tear gas and batons to break up a demonstration in Peshawar in northwest Pakistan, where more than 100 Bhutto followers blocked the main road, torching billboards and posters of the party behind Musharraf.
They shouted slogans including "Musharraf is a dog" and "Long live Bhutto." Furious protesters took to the streets in groups, some of them opening fire in the air and screaming. One local police station was pelted with stones.
There were also protests in the central city of Multan, and shops were shut in Karachi, Bhutto's home city, where protesters burnt tires and blocked key roads.
Bhutto had returned in October amid negotiations with Musharraf -- who was then also still army chief -- on a power-sharing deal.
But her homecoming parade was quickly hit in the deadliest terror attack in Pakistan's history, leaving 139 dead. Bhutto only survived after ducking down at the moment of impact behind her armored vehicle.
The talks with Musharraf ended in acrimony after he declared a state of emergency on November 3.
Until her death she had been campaigning strongly against what she branded his dictatorial rule, promising her Pakistan People's Party would deliver true democracy.
There have been more than 40 suicide attacks in Pakistan so far this year that have left at least 770 people dead.
Bhutto's father, also a prime minister, was hanged by the military in 1979 after being ousted from power.
Recalling standing at his grave, she once wrote: "At that moment I pledged to myself that I would not rest until democracy had returned to Pakistan."
A shaken Nawaz Sharif, Bhutto's main rival in the election, said he shared the grief of the entire nation and promised to take up her fight.
"I assure you that I will fight your war from now on," Sharif told Bhutto's supporters, who were crying and wailing outside the hospital here.
"I don't think anybody stands to gain or [will] look to gain. It's a very serious situation for the country today," he told the BBC by telephone later, and accused the government of not doing enough to ensure her security.
Countries around the world expressed shock at the killing. Britain appealed for restraint and unity, and Russia, Japan, Iran, France, and the Arab League all added their condemnation.