Gadhafi ruled Libya for 42 years until he was ousted during an uprising earlier this year that turned into a bloody civil war.
Libya's rebel government said Gadhafi was cornered by insurgents in his hometown of Sirte.
French fighter jets reportedly stopped a convoy carrying Gadhafi and then ground forces moved in, killing the former leader.
Gruesome images of Gadhafi's body splashed across the Al Jazeera network. The video showed him in a blood-soaked shirt and bloodied face, restrained by rebel fighters up against the hood of a truck. The rebels then push him toward another car as he shouts and struggles against them.
There were conflicting accounts on how Gadhafi died, but little doubt to his demise.
News of the 69 year old's death triggered jubilant celebrations in the streets of Tripoli. Rebel fighters embraced in the streets.
Libyan officials confirmed Gadhafi's death and said they had been waiting for this moment for a long time.
During a news conference, President Barack Obama said Gadhafi's death "marks the end of a long and painful chapter" for Libya.
"This is a momentous day in the history of Libya," the president said. "The dark shadow of tyranny has been lifted and with this enormous promise, the Libyan people now have a great responsibility to build an inclusive and tolerant and democratic Libya that stands as the ultimate rebuke to Gadhafi's dictatorship."
Officials in Libya said one of Gadhafi's sons was also killed in the attack.
Gadhafi seized power in Libya in 1969 and soon became one of the world's most fervent anti-Americans. In 1986, his agents targeted a Berlin disco popular with American soldiers.
President Ronald Reagan ordered an airstrike on Gadhafi's compound. Two years later, Gadhafi retaliated by blowing up Pan Am Flight 103 over Lockerbie, Scotland, which killed 270 people, including 190 Americans.
After Sept. 11 and the invasion of Iraq, Gadhafi changed his stance. He condemned Osama bin Laden and began to give up his chemical and nuclear weapons programs.
Gadhafi is the first leader to be killed in the Arab spring uprisings.
NATO forces helped the rebels achieve this victory. With Gadhafi gone, some feel it could lead to better relations with the West.
There was swift reaction to Gadhafi's death, including people with Libyan roots living in Southern California.
"It's a freedom day, it's an independence day, it's a joyful day," said Mohamed Gibani, a Diamond Bar grocery store owner who left Libya in the late 1970s to escape the Gadhafi regime. "This is the happiest day for every single Libyan you can meet."
"We are very optomistic of the future of Libya," said Abulkasem Dowa, a student earning his doctorate in business.