Nikolai Patrushev, head of Russia's Federal Security Service (FSB), said 41-year-old Basayev, who claimed responsibility for the 2004 Beslan school siege and the 2002 Moscow theater attack, had been killed during the night in the North Caucasus republic of Ingushetia.
"Basayev and a number of militants were eliminated in Ingushetia last night," Patrushev told President Vladimir Putin.
Security services reported earlier in the day that a group of militants had been killed preparing for a terrorist attack when their explosive-laden truck blew up. And it later transpired that Basayev had been traveling in an accompanying car.
A local police source said, "Basayev's body was found by FSB officers after a car wired with explosives blew up. The convoy included three cars with militants, one of which was Basayev."
"The terrorist was decapitated by the explosion, but from characteristic traits, it was suggested that the body was none other than Shamil Basayev," the source said.
After initial examinations, the terrorist's identity was confirmed, he said.
Russian television channel NTV said no civilians had been hurt in the explosion, which was equivalent to more than 100 kilograms (220 lbs) of TNT, as it had occurred at midnight. The channel said the security service had "helped" blow up the truck.
President Putin hailed the news ordering state awards for the officers who prepared and conducted the operation.
"This is just retribution for the bandits for our children in Beslan, Budyonnovsk, and for all the terrorist attacks they carried out in Moscow and other regions of Russia, including in Ingushetia and the Chechen Republic," Putin said.
A close ally of Chechen deceased separatist leaders Dzhokhar Dudayev and Aslan Maskhadov, Basayev first came to notoriety when he led an armed raid on the town of Budyonnovsk in southern Russia in 1995. He took around 1,500 people hostage in a hospital and put pregnant women in windows as a human shield against police operations. About 150 people died in subsequent fighting.
In June 2004, he was accused of commanding a raid on Ingushetia, where police said militants attacked 19 police precincts and prisons.
He also claimed responsibility for masterminding a string of bombings in Moscow, including an attack on the subway in February 2004 that killed 40, the 2002 Dubrovka theater siege, which left 130 people dead, and the assassination of pro-Kremlin Chechen President Akhmad Kadyrov in May 2004.
The late president's son, Ramzan, now Chechnya's prime minister, hailed the news of Basayev's death and said other militants would be undermined.
"Even those people who have not yet realized the perniciousness of this [terrorist] path will understand that their actions have no future," he said.
But Basayev will probably be remembered above all else for saying he had organized and financed the Beslan school siege in September 2004, which led to the death of 331 people, including 186 children.
More than a thousand children, their parents and grandparents, were held hostage for three days without food or water before a series of explosions finally led the building being stormed.
Although Russian authorities have reported Basayev's death several times in the past, there appears to be complete certainty that this time they have got their man.
A senior security official said DNA tests would be carried out to eradicate any doubts.
"Even though special forces are 100% sure that Basayev has been killed, his death will be confirmed. The terrorist's remains will be brought to a medical laboratory, where an analysis will be carried out," the source said.
The DNA test will take around a week, he said.
Patrushev said the militants had planned to put political pressure on Russia during upcoming this weekend's summit of the G8 club of industrialized democratic nations in St. Petersburg.
He also said the operation had been a success after the FSB had strengthened its positions overseas, mainly in countries where weapons were collected and delivered to Russia for terrorist attacks.
Russian politicians were quick to welcome the operation and highlight its importance for the future of the North Caucasus.
"After Basayev's killing we can justifiably hope for even more positive changes in Chechnya and other republics in the North Caucasus, as many terrorists raised Basayev's banner," Sergei Mironov, the speaker of the upper chamber of parliament, told journalists.
Alu Alkhanov, the president of Chechnya, said "one of the blackest pages in the history" of the North Caucasus republic had been turned.
"Basayev's actions caused the complete devastation of [Chechnya's] economy, thousands of deaths, and dozens of terrorist acts both in Chechnya and throughout Russia," he said.