Interim government officials said one of Gadhafi's sons, his former national security adviser Muatassim, also was killed in Sirte, and another, one-time heir apparent Seif al-Islam, was wounded and captured.
The 69-year-old Gadhafi is the first leader to be killed in the Arab Spring wave of popular uprisings that swept the Middle East, demanding the end of autocratic rulers and the establishment of greater democracy.
"We have been waiting for this moment for a long time. Moammar Gadhafi has been killed," Prime Minister Mahmoud Jibril told a news conference in the capital of Tripoli.
His death decisively ends a regime that had turned Libya into an international pariah and ran the oil-rich nation by the whim and brutality of its notoriously eccentric leader.
Libya stands on the cusp of a new era, but its turmoil may not be over. The former rebels who now rule are disorganized and face rebuilding a country virtually without institutions by Gadhafi's design. They have already shown signs of infighting, with divisions between geographical areas and Islamist and more secular ideologies.
President Barack Obama told the Libyan people: "You have won your revolution."
Although the U.S. briefly led the NATO bombing campaign in Libya that sealed Gadhafi's fate, Washington later took a secondary role to its allies. Britain and France said they hoped that his death would lead to a more democratic Libya.
French President Nicolas Sarkozy said it would allow Libyans "to free themselves from the dictatorial and violent regime."
There were confusing reports of Gadhafi's capture and death, and questions remained over exactly how he was killed.
Arab broadcasters showed graphic images of the balding, goateed Gadhafi - wounded, with a bloodied face and shirt - but alive. Later video showed fighters rolling Gadhafi's lifeless body over on the pavement, stripped to the waist and a pool of blood under his head.
While he was still alive, the fighters drove him around lying on the hood of a truck, perhaps to parade him in public. One fighter held him down, pressing on his thigh with a pair of shoes in a show of contempt.
Standing upright, he is shoved along a Sirte road by fighters who chanted "God is great."
Gadhafi appears to struggle against them, stumbling and shouting as the fighters push him onto the hood of a pickup truck.
"We want him alive. We want him alive," one man shouted before Gadhafi is dragged away, some fighters pulling his hair, toward an ambulance.
Most accounts agreed Gadhafi had been holed up with heavily armed supporters in the last few buildings held by regime loyalists in the Mediterranean coastal town, furiously battling revolutionary fighters. The battle for Sirte has been raging for more than a month.
At one point, a convoy tried to flee and was hit by NATO airstrikes, carried out by French warplanes. France's Defense Minister Gerard Longuet said the 80-vehicle convoy was carrying Gadhafi and was trying to escape the city. The strikes stopped the convoy but did not destroy it, and then revolutionary fighters moved in on the vehicle carrying Gadhafi.
One fighter who said he was at the battle told AP Television News that the final fight took place at an opulent compound. Adel Busamir said the convoy tried to break out but after being hit, it turned back and re-entered the compound. Several hundred fighters attacked.
"We found him there," Busamir said of Gadhafi. "We saw them beating him (Gadhafi) and someone shot him with a 9mm pistol ... then they took him away."
Military spokesman Col. Ahmed Bani in Tripoli told Al-Jazeera TV that a wounded Gadhafi "tried to resist (revolutionary forces) so they took him down."
Fathi Bashaga, spokesman for the Misrata military council, whose forces were involved in the battle, said fighters encircled the convoy and exchanged fire. In one vehicle, they found Gadhafi, wounded in the neck, and took him to an ambulance. "What do you want?" Gadhafi asked the approaching revolutionaries, Bashaga said, citing witnesses.
Gadhafi bled to death from his wounds a half-hour later, he said. Fighters said he died in the ambulance en route to Misrata, 120 miles from Sirte.
Abdel-Jalil Abdel-Aziz, a doctor who accompanied the body in the ambulance and examined it, said Gadhafi died from two bullet wounds - to the head and chest.
"You can't imagine my happiness today. I can't describe my happiness," he told The Associated Press. "The tyranny is gone. Now the Libyan people can rest."
Amnesty International urged the revolutionary fighters to report the full facts of how Gadhafi died, saying all members of the former regime should be treated humanely. The London-based rights group said it was essential to conduct "a full, independent and impartial inquiry to establish the circumstances of Col. Gadhafi's death."
Later, Gadhafi's body was paraded through the streets of Misrata on top of a vehicle surrounded by a large crowd chanting, "The blood of the martyrs will not go in vain," according to footage aired on Al-Arabiya television. The fighters who killed Gadhafi are believed to have come from Misrata, a city that suffered a brutal weeks-long siege by Gadhafi's forces during the eight-month civil war.
Celebratory gunfire and cries of "God is great" rang out across Tripoli. Motorists honked and people hugged each other. In Sirte, the ecstatic former rebels celebrated the city's fall after weeks of fighting by firing endless rounds into the sky, pumping their guns, knives and even a meat cleaver in the air and singing the national anthem.
"We would have wanted him alive for trial. But personally, I think it is better he died," Bashaga said.
The capture of Sirte, the death of Gadhafi, and the death and capture of his two most powerful sons, gives the transitional leaders confidence to declare the entire country "liberated."
It rules out a scenario some had feared - that Gadhafi might flee deep into Libya's southern deserts and lead a resistance campaign.
Information Minister Mahmoud Shammam told AP that Muatassim Gadhafi was killed in Sirte. Abdel-Aziz, the doctor who accompanied Gadhafi's body in the ambulance, said Muatassim was shot in the chest.
The justice minister said Gadhafi's son and one-time heir apparent, Seif al-Islam, had been wounded in the leg and was being held in a hospital in the city of Zlitan, northwest of Sirte. Shammam said Seif was captured in Sirte.
Following the fall of Tripoli on Aug. 21, Gadhafi loyalists mounted fierce resistance in several areas, including Sirte, preventing Libya's new leaders from declaring full victory. Earlier this week, revolutionary fighters gained control of one stronghold, Bani Walid.
By Tuesday, fighters said they had squeezed Gadhafi's forces in Sirte into a residential area of about 700 square yards but were still coming under heavy fire from surrounding buildings.
In an illustration of how heavy the fighting has been, it took the anti-Gadhafi fighters two days to capture a single residential building.
Reporters watched as the final assault began around 8 a.m. Thursday and ended about 90 minutes later. Just before the battle, about five carloads of Gadhafi loyalists tried to flee the enclave down the coastal highway that leads out of the city. But they were met by gunfire from the revolutionaries, who killed at least 20 of them.
Col. Roland Lavoie, spokesman for NATO's operational headquarters in Naples, Italy, said the alliance's aircraft struck two vehicles of pro-Gadhafi forces "which were part of a larger group maneuvering in the vicinity of Sirte."
After the battle, revolutionaries began searching homes and buildings looking for any hiding Gadhafi fighters. At least 16 were captured, along with cases of ammunition and trucks loaded with weapons. Reporters saw revolutionaries beating captured Gadhafi men in the back of trucks and officers intervening to stop them.
The fighters looking like the same ragtag force that started the uprising jumped up and down with joy and flashed V-for-victory signs. Some burned the green Gadhafi flag, then stepped on it with their boots.
They chanted "God is great" while one fighter climbed a traffic light pole to unfurl the revolution's flag, which he first kissed. Discarded military uniforms of Gadhafi's fighters littered the streets. One revolutionary fighter waved a silver trophy in the air while another held up a box of firecrackers, then set them off.
"Our forces control the last neighborhood in Sirte," Hassan Draoua, a member of Libya's interim National Transitional Council, told the AP in Tripoli. "The city has been liberated."
Associated Press reporters Rami al-Shabheibi in Tripoli, Libya and Hadeel Al-Shalchi, Maggie Michael and Sarah El Deeb in Cairo contributed to this report. Gamel reported from Tripoli.