News of her death was confirmed by a military spokesman and members of her Pakistan People's Party (PPP).
Ms Bhutto had just addressed a pre-election rally in the town of Rawalpindi when the attack 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.
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.
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).
The blast caused carnage
Supporters at the hospital began chanting "Dog, Musharraf, dog", referring to President Pervez Musharraf, the Associated Press (AP) reports.
Some broke the glass door at the main entrance to the emergency unit as others wept.
A man with a PPP flag tied around his head could be seen beating his chest, the agency adds.
An interior ministry spokesman, Javed Cheema, was quoted as saying by AFP that she may have been killed by pellets packed into the suicide bomber's vest.
However, AP quoted a PPP security adviser as saying she was shot in the neck and chest as she got into her vehicle, before the gunman blew himself up.
Return from exile
The killing was condemned by the US and Russia, and a statement is expected shortly from the UK.
"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.
Russia's foreign ministry condemned the attack, offered condolences to Ms Bhutto's family and said it hoped the Pakistani leadership would "manage to take necessary steps to ensure stability in the country".
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.
Earlier on Thursday at least four people were killed ahead of an election rally that Pakistan's former Prime Minister Nawaz Sharif was preparing to attend close to Rawalpindi
Sad. Very sad.
At least Singapore's political climate is not that dangerous.
The most you get is sued to bankrupty or detained for 30 years.
This is my praise for PAP.
I read from somewhere tat she is the one who refused to answer any calls from our garment during the SQ hijack.