The attack took place during a political rally in Rawalpindi in Pakistan ahead of the general election on January 9. Around 20 people are believed to have died in the attack.
An official with Bhutto's Pakistan People's Party, Rehman Malik, confirmed her death, saying, "She has been martyred."
According to police, a suicide bomber fired shots at Bhutto, 54, as she was leaving the rally venue in a park. He then blew himself up.
"The man first fired at Bhutto's vehicle. She ducked and then he blew himself up," said police officer Mohammad Shahid.
According to Ary-One Television, Bhutto had been shot in the head prior to the explosion.
"It is the act of those who want to disintegrate Pakistan because she was a symbol of unity. They have finished the Bhutto family. They are enemies of Pakistan," senior Bhutto party official Farzana Raja told Reuters news agency.
President Pervez Musharraf has not yet commented on the attack, his spokesman saying he was still awaiting confirmation of the death.
British Foreign Secretary David Miliband expressed his shock at Bhutto's death and called for restraint.
"In targeting Benazir Bhutto, extremist groups have in their sights all those committed to democratic processes in Pakistan. They cannot and must not succeed," he said in a statement.
"This is a time for restraint but also unity."
The White House condemned the acts of violence in Pakistan. President Bush is due to make a statement on the killing at 16.00 GMT.
India, meanwhile, called Bhutto's death a terrible blow to democracy in Pakistan.
"It is equally sad that this happened when the people of Pakistan were looking up to her," junior Indian foreign minister Anand Sharma told the NDTV news channel.
"It is a terrible blow to the democratic process, and no words are adequate to condemn this abominable act," he said. "We offer our condolences to her bereaved family members but also to her friends and supporters at this hour of their grief."
