Wali, 44, was standing next to an Al Jazeera cameraman on the fourth floor of the Khaddam Al Hussain hotel where the crew were housed.
They were filming fierce early morning clashes between US occupation forces and elements of the al-Mahdi army, made up of followers of the Shia leader Muqtada al-Sadr, journalist Abd al-Adhim Muhammad reported.
"He looked up to try to locate the place of the US military vehicles, but he was shot in the head by machine guns," Muhammad said. He died instantly.
There was a power cut followed by a heavy exchange of fire as US vehicles rumbled by, he said.
"We could not confirm the source of the fire but it was directly pointed at us," Muhammad said. Another nine civilians were killed in the fighting.
Saad Ibrahim, Al Jazeera bureau chief, said: "He had worked with us for a long time and had arrived in Kerbala only two days earlier to relieve the previous crew."
Al Jazeera statement
An official Al Jazeera statement said: "No verifiable information was immediately available as to the source of the bullet that led to Rashid's untimely death, however, eyewitnesses showed members of the media corps samples of the bullets that hit the vicinity of the hotel rooftop."
Al Jazeera also called on US officials to investigate Wali's death.
"Al Jazeera urgently calls on the US occupation and the CPA [Coalition Provisional Authority] to immediately conduct a full official investigation into the death of Rashid Hamid Wali, and to make the result public," the channel said.
Wali, or Abu Nur as he was known, was an Iraqi and the father of six children, the eldest of whom was 16 at the time of his death.
Rashid joined Al Jazeera in March 2003 and soon became one of the most active and daring members of Al Jazeera's field teams, commanding respect, appreciation and love from his colleagues.
Wali was widely mourned and is
sorely missed by his colleagues
Upon news of the killing, Al Jazeera's Baghdad bureau was flooded with calls from journalists offering condolences, correspondent Yusuf al-Shuli reported.
There was also fury among journalists, he said.
Iraq-based journalists said they regarded his death as not only a loss for Al Jazeera, but for the entire media corp in Iraq, al-Shuli said.
A sombre procession including distraught employees, relatives, Arab and foreign journalists converged at the Al Jazeera bureau where Wali's coffin was brought before being taken to his home where family members would say goodbye.
Members of the Iraqi Journalists Union were also present.
Gareth Bailey, spokesman for the CPA, the occupation authority, told Al Jazeera that it was "still early to report the real story".
With so many journalists in Iraq, Bailey said, risks were higher for journalists to be killed as clashes continued between occupation troops and fighters.
"Our target is not the journalists," he said.