Azahari Husin was regarded by security experts in Indonesia, Australia, Malaysia as a master bomb maker and say he designed a car bomb used in the 2002 bombings on the island of Bali.
Indonesian national police chief General Sutanto said fingerprint tests proved Azahari was one of two men killed in the town of Batu in East Java province on Wednesday.
Azahari was either shot dead or killed when a fellow rebel exploded a bomb, he said.
"The condition of Azahari's corpse is that it was severed around the legs and torso. He was not able to reach the button (of a bomb) because officers shot him first, but the other one was able to commit a suicide bombing," Sutanto told reporters in Batu.
That made it hard to determine what actually killed Azahari, said Sutanto, adding police found 30 bombs inside the house where he had holed up.
Dubbed the "demolition man" by newspapers in his native
Police found 30 bombs in
Malaysia, Azahari was the suspected brains behind several bomb attacks on Western targets in Indonesia and the top bomb maker in Jemaah Islamiah, a shadowy regional network linked to al-Qaida.
Authorities say the electronics expert designed and supervised the making of the car bomb that caused the most damage in 2002 Bali bombings.
The attacks killed 202 people, including 88 Australians.
Despite Azahari's death, Ansyaad Mbai, who heads Indonesia's anti-terrorist coordinating board, said it was too early to declare victory.
"A movement with ideological and political motives won't die, even if the leading figure dies," he told Reuters.
Jemaah Islamiah would not be crippled by Azahari's death, but it would be a major step in the war on terrorism, said Australian Prime Minister John Howard.
"It is a huge advance, but we are going to be embroiled in this struggle for years," he said.
Analysts said Azahari's death would be a political boost for President Susilo Bambang Yudhoyono, at a time of negative headlines over surging inflation and deadly bird flu.
"It is very positive for sure. He (Azahari) has been the main target of the police," said political analyst Andi Widjajanto.
"A movement with ideological and political motives won't die, even if the leading figure dies"
Head of Indonesia's anti-terrorist board
Speaking in Bangkok, Australian Federal Police Commissioner Mick Keelty said he was hopeful Azahari's death might help authorities locate his partner in previous attacks, Noordin M. Top, also Malaysian and a senior member of Jemaah Islamiah.
While Azahari has been the key Jemaah Islamiah bombmaker, Top's special talent has been in recruiting bombers in poverty-stricken Indonesia, security experts have said.
Besides searching the Batu house for evidence, police on Wednesday detained a man in the Central Java city of Semarang who had taken explosives and ammunition from the hideout.
East Java province lies adjacent to Bali, where three bombers killed 20 people on 1 October in the latest attack.
Police said on Thursday for the first time that they also had evidence linking Azahari to those attacks.