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 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.
Libya's new leaders had said they would declare the country's "liberation" after the fall of Sirte.
President Obama said Gadhafi's death "marks the end of a long and painful chapter" for Libya. Vice President Joe Biden said the Libyan people had rid themselves of a dictator and have now "got a chance" with Gadhafi gone.
Footage aired on Arab TV networks showed Gadhafi was captured wounded but alive in Sirte. The goateed, balding Gadhafi is seen in a blood-soaked shirt, and his face bloodied. Standing upright, he is shoved along by a crowd of fighters on a Sirte roadside, chanting "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 shouts before Gadhafi is dragged away, some fighters pulling his hair, toward an ambulance. Later footage showed fighters rolling Gadhafi's lifeless body over on the pavement, stripped to the waist and a pool of blood under his head.
Out of initial confusion, a clearer picture began to emerge of Gadhafi's last hours, though there were still contradictions.
Most accounts agreed Gadhafi had been holed up with heavily armed supporters in the last few buildings held by regime loyalists in his Mediterranean coastal hometown of Sirte, furiously battling advancing revolutionary fighters.
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 himself.
Fathi Bashaga, spokesman for the Misrata military council, whose forces were involved in the Sirte siege, said fighters encircled the convoy and exchanged fire with several of the vehicles. In one, they found Gadhafi, wounded in the neck, and took him to an ambulance. "What do you want?" Gadhafi said to the approaching revolutionaries, Bashaga said, citing witnesses.
Gadhafi bled to death from his wounds a half-hour later, he said.
Abdel-Jalil Abdel-Aziz, a doctor who was part of the medical team that 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."
Gadhafi's body was then paraded through the streets of the nearby city 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 long civil war.
Celebratory gunfire and cries of "God is Great" rang out across the capital Tripoli. Cars honked their horns and people hugged each other. In Sirte, the ecstatic former rebels celebrated the city's fall after weeks of bloody siege by firing endless rounds into the sky, pumping their guns, knives and even a meat cleaver in the air and singing the national anthem.
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" as they have said they would do.
It rules out a scenario that some had feared -- that he might flee deeper into Libya's southern deserts and lead a resistance campaign against Libya's rulers.
Information Minister Mahmoud Shammam told AP that Muatassim Gadhafi was killed in Sirte. 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.
Sirte's fall caps weeks of heavy, street-by-street battles as revolutionary fighters besieged the city. Despite 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 in the eight-month civil war. 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 Thursday morning struck two vehicles of pro-Gadhafi forces "which were part of a larger group maneuvering in the vicinity of Sirte."
The Misrata Military Council, one of the command groups, said its fighters captured Gadhafi.
One fighter who said he was at the battle told AP Television News that the final fight took place at an opulent compound for visiting dignitaries built by Gadhafi's regime. Adel Busamir said the convoy tried to break out but after being hit it turned back and re-entered the compound. Several hundred fighters assaulted.
"We found him there," Busamir said. "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."
"I reassure everyone that this story has ended and this book has closed," he said.
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.
In the central quarter where Thursday's final battle took place, the fighters looking like the same ragtag force that started the uprising eight months ago 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 Associated Press in Tripoli. "The city has been liberated."
Associated Press Writer Kim Gamel in Tripoli contributed to this report.