Ms Bhutto had just addressed an election rally in Rawalpindi when she was shot in the neck by a gunman who then reportedly set off a bomb.
At least 15 other people died in the attack and several more were injured.
President Pervez Musharraf and his government called on people to remain calm so that the
"nefarious designs of terrorists can be defeated."
Ms Bhutto had twice been the country's prime minister and had been campaigning ahead of elections due in January.
Nawaz Sharif, also a former prime minister and a political rival, told media 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 News 24 after returning from the hospital where she was brought.
It was the second suicide attack against Benazir Bhutto in recent months and comes amid a wave of bombings targeting security and government officials.
Ms Bhutto's death has plunged her party into confusion and raised questions about whether January elections will go ahead as planned, the BBC's Barbara Plett in Islamabad says.
The PPP has the largest support of any party in the country.
Analysts note that Rawalpindi, the nerve centre of Pakistan's military, is seen as one of the country's most secure cities, making the attack even more embarrassing for the government of Gen Musharraf.
Scene of grief
The explosion occurred close to an entrance gate of the park in Rawalpindi where Ms Bhutto had been speaking.
Wasif Ali Khan, a member of the PPP who was at Rawalpindi General Hospital, said she died at 1816 (1316 GMT).
Supporters at the hospital began chanting "Dog, Musharraf, dog", the Associated Press (AP) reports.
Some supporters wept while others exploded in anger, throwing stones at cars and breaking windows.
Police confirmed reports Ms Bhutto had been shot in the neck and chest before the gunman blew himself up.
Mr Sharif said there had been a "serious lapse in security" by the government.
Earlier on Thursday, at least four people were killed ahead of an election rally he himself had been preparing to attend close to Rawalpindi.
Return from exile
The killing was condemned by the US, the UK, Russia and France.
"The attack shows that there are still those in Pakistan trying to undermine reconciliation and democratic development in Pakistan,"
a US state department official said.
UK Foreign Secretary David Miliband said he was "deeply shocked" by Ms Bhutto's death and called for "restraint but also unity".
"Extremist groups... cannot and must not succeed,"
Russia called on Pakistan's leaders to ensure stability while France spoke of an "odious" act and said it was deeply concerned.
Ms Bhutto returned from self-imposed exile in October after years out of Pakistan where she had faced corruption charges.
Her return was the result of a power-sharing agreement with President Musharraf in which he granted an amnesty that covered the court cases she was facing.
Since her return relations with Mr Musharraf had broken down.
On the day of her return she led a motor cavalcade through the city of Karachi. It was hit by a double suicide attack that left some 130 dead.