The demise of the hated dictator, who ruled his oil-rich North African nation with an iron rod for close on 42 years, sparked a spontaneous outpouring of joy and celebratory gunfire in streets across Libya.
"We announce to the world that Gaddafi has died in the custody of the revolution," National Transitional Council (NTC) spokesman Abdel Hafez Ghoga said in the eastern city of Benghazi.
"It is an historic moment. It is the end of tyranny and dictatorship. Gaddafi has met his fate," he added.
In Tripoli, interim premier Mahmud Jibril said NTC leader Mustafa Abdel Jalil was to declare by Friday that the country has been liberated, paving the way for the formation of an interim government ahead of elections.
As Libyans danced for joy in the streets, world leaders welcomed Gaddafi's demise as the end of despotism, tyranny, dictatorship and ultimately war in Libya.
Colonel Gaddafi , whose whereabouts were unknown since NTC fighters overran the capital in August, was captured in a sewage pipe waving a golden gun near Sirte, Libyan fighters said.
"Gaddafi was in a jeep when rebels opened fire on it. He got out and tried to flee, taking shelter in a sewage pipe," an NTC field commander, Mohammed Leith, told AFP.
NTC fighters "opened fire again and he came out carrying a Kalashnikov (assault rifle) in one hand and a pistol in the other," he said.
Gaddafi "looked left and right and asked what was happening. Rebels opened fire again, wounding his leg and shoulder. He died after that," according to Leith.
But according to Jibril, Kadhafi was shot in the head "in crossfire" between his supporters and new regime fighters after his capture.
"When he was found, he was in good health, carrying a gun," Jibril told a press conference in Tripoli. Gaddafi was transferred from the sewage pipe to a pickup truck, at which point he was shot in the right hand.
"When the vehicle started moving, it was caught in crossfire between Gaddafi fighters and the revolutionaries, and he was shot in the head," according to Jibril.
"He was alive up to last moment, until he arrived at hospital" in the town of Misrata.
French Defence Minister Gerard Longuet revealed that a French Mirage-2000 fired a warning shot at a column of up to 80 vehicles trying to flee Sirte early Thursday.
Libyan fighters then intervened, destroying the vehicles, from which "they took out Colonel Gaddafi," he added.
Longuet told reporters in Paris that the convoy "was stopped from progressing as it sought to flee Sirte but was not destroyed by the French intervention."
A videotape aired on Arab satellite channels showed a bloodied Kadhafi alive and walking as he was being manhandled by Libya's new regime fighters after his capture.
NTC fighters circled the 69-year-old ousted strongman, who was bloodied in the head, face and shoulders, as he apparently tried to cry out.
Leith, the NTC commander, said one of Gaddafi's sons, Mutassim, was also killed in Sirte. "We found him dead. We put his body and that of (ex-defence minister) Abu Bakr Yunis Jabar in an ambulance to take them to Misrata."
The NTC's Jibril said that Kadhafi's most prominent son and one-time heir apparent, Seif al-Islam, was believed to be pinned down in a village near Sirte.
Witnesses said they saw the bodies of both Gaddafi and Mutassim in Misrata late on Thursday. "I saw his body, he had a wound on his head," said one witness, Hakim al-Farjani.
"There was a lot of blood on his body. He had a bandage on his stomach," he said. "The body came in an ambulance. Then the crowd became bigger and bigger so they took the body away."
An AFP photographer also saw Mutassim's body after it had been transferred to Misrata.
News of Gaddafi's death came as new regime troops overran the last redoubt of his loyalists in Sirte, bringing to an end a two-month siege.
Fighters moving in from east and west overcame the last resistance in the city's Number Two residential neighbourhood where his diehard supporters had been holed up.
"Sirte has been liberated, and with the confirmation that Kadhafi is dead," Libya has been completely liberated, a top NTC military official, Khalifa Haftar, told AFP in Tripoli.
Fighters who had fought in the bloody eight-month conflict that toppled the despot at a cost of more than 25,000 lives, erupted in jubilation, firing volleys of gunfire into the sky and chanting "Allahu Akbar" (God is greatest).
Pick-up trucks blaring out patriotic music criss-crossed the streets of Sirte as fighters flashed V for victory signs and chanted "Allahu Akbar" (God is greatest).
"We did it! We did it!" chanted the fighters overcome with emotion, exchanging well-wishes, hugs and handshakes against a backdrop of intense celebratory gunfire.
World leaders began to weigh in on the death of the man who had ruled the oil-rich nation.
US President Barack Obama said Gaddafi's death ended a long, painful chapter for Libyans and warned "iron fist" regimes in the rest of the Arab world they would inevitably fall.
Speaking in the White House Rose Garden, Obama said Kadhafi's demise vindicated the collective military action of the West and said Libyans now had a chance to build a "democratic" and "tolerant nation."
British Prime Minister David Cameron said the death was an occasion to remember his victims, while hailing it as a chance for a "democratic future" for Libya.
French President Nicolas Sarkozy also hailed the end of Kadhafi and urged the country's new regime to pursue democratic reforms.
French and British forces spearheaded the air campaign against Kadhafi's military by the NATO military alliance, which has launched nearly 1,000 strike sorties since March 31.
NATO chief Anders Fogh Rasmussen said the alliance will begin Friday winding up its six-month mission in Libya.
Arab League chief Nabil al-Arabi he hoped the death of Gaddafi would "turn the page of tyranny."
Arabi urged Libyans to "overcome the wounds of the past and to look to the future with no grudges or sentiments of revenge, warding off all that could disrupt national unity and peace."
UN chief Ban Ki-moon said it ushered in a "historic transition" for Libya.
"The road ahead for Libya and its people will be difficult and full of challenges. Now is the time for all Libyans to come together," he said at the UN headquarters.
Medics said at least three NTC fighters were killed and 30 wounded in Thursday's fighting in Sirte, after 18 were killed and around 180 wounded over the previous two days.
Fifty pro-Gaddafi fighters were killed and 150 taken prisoner, including three women, said NTC commander Leith. There was no independent confirmation of the toll.