An interior ministry official said Mayssun al-Hashemi was travelling in her car in the al-Ilam neighbourhood when "gunmen ambushed her car and sprayed it with bullets, killing her and her driver".
The television station of al-Hashemi's Iraqi Islamic Party interrupted its programming to show picture's of her bulletriddled and blood-stained mini-bus.
The vehicle had been blocked by a car and gunmen then swarmed the mini-bus and fired 32 shots at al-Hashemi's sister and her driver, said a station announcer.
An Iraqi Islamic party official said no one in the neighbourhood came forward to provide medical care to the victims out of fear.
Earlier this month, al-Hashemi's brother, Mahmud, was shot dead in Baghdad.
Also on Thursday, four soldiers - three Italian and one Romanian - were killed when a bomb hit their convoy in the southern city of Nasiriya.
Al-Hashemi was elected as Iraq's new vice-president last week, along with Jalal Talabani as president and Adel Abdel Mahdi as the other vice-president.
Al-Hashemi is the head of Iraqi Islamic party, a key partner in the Sunni-led National Concord Front, a major parliamentary bloc in the country's 275-member parliament. The front holds 44 seats in the assembly.
The National Concord Front, denounced the latest killing. "It is a cowardly and criminal act which comes just two weeks after the murder of Hashemi's brother," said Dhafer Ani, the front's spokesman.
People gathered to pay condolences to al-Hashemi at the Iraqi Islamic party's headquarters in the western Yarmuk neighbourhood.
The killing comes after al-Hashemi denounced a video message from al-Qaeda's frontman in Iraq, Abu Musab al-Zarqawi, called for the new government to use force to reimpose order.
Al-Hashemi hit headlines recently when Jill Carroll, the American journalist, was dropped outside his party office by her captors after three months of captivity in Iraq.
He later handed her over to the US military.