Bhutto, 54, was declared dead after she was taken to the Rawalpindi general hospital.
"At 6:16pm [13:16 GMT], she expired," Wasif Ali Khan, a member of Bhutto's Pakistan People's Party (PPP), who was present at the hospital, said.
Police said a suicide bomber fired at Bhutto as she was leaving the rally venue in a park before blowing himself up.
"The man first fired at Bhutto's vehicle. She ducked and then he blew himself up," Mohammad Shahid, a police officer said.
The assassination raised serious questions over whether parliamentary polls, scheduled for January 8, would now take place.
Pervez Musharraf, the Pakistani president, appealed to the nation to remain calm "so that the evil designs of terrorists can be defeated," state TV reported.
He also announced three days of national mourning.
But as news of Bhutto's death spread, her supporters took to the streets across Pakistan to show their anger at her killing.
Two people were shot dead in rioting in the eastern city of Lahore and two others were killed in the southern province of Sindh, Bhutto's birthplace, according to police.
Angry supporters also took to the streets in the northwestern city of Peshawar as well other areas, chanting anti-Musharraf slogans.
The interior ministry responded by putting its forces on red alert.
Following the blast, body parts and flesh were strewn across Liaqat Bagh park where Bhutto had spoken.
Police cordoned off the street with white and red tape, and rescue workers rushed to carry victims to ambulances.
Javaid Manzoor, the president of Bhutto's PPP party, told Al Jazeera: "We are shocked. We are stunned. Every single one of us is mourning the loss of our leader."
Al Jazeera's Sohail Rahman said questions would now be raised about security at political rallies in Pakistan.
Nawaz Sharif, also a former Pakistani prime minister, who was also contesting the January 8 poll, called for a general strike on Friday in protest at the killing.
He also said his party would boycott the poll, blaming the Pakistani president.
"Free elections are not possible in the presence of Musharraf," he said, calling on the president to resign.
"Musharraf is the root cause of all problems."
The killing is likely to deepen the political crisis in Pakistan, where radicals had vowed to disrupt the vote and Musharraf's opponents, including Bhutto, accused him of planning to rig the result.
|Bhutto's supporters vented their anger|
after her killing [AFP]
Manzoor said he believed the poll would now be cancelled.
Asif Ali Zardari, Bhutto's husband, later arrived in Islamabad from Dubai to collect his wife's body and take it for burial in Larkana, the Bhutto ancestral home where her father is buried.
Bhutto had served twice as Pakistani prime minister between 1988 and 1996.
She had returned to Pakistan from an eight-year exile on October 18.
Her homecoming parade in Karachi was also targeted by a suicide attacker, killing more than 140 people.
On that occasion she narrowly escaped injury.
Earlier on Thursday, four people were shot dead and three wounded at an election rally of Sharif in Rawalpindi.
Sharif blamed supporters of the party that backs Musharraf.
The attacks are the worst directly related to the January 8 polls since campaigning intensified in mid-December.