General Qasem Soleimani, the head of the Iranian Revolutionary Guards' elite Quds Force, has been killed by US forces in Iraq, reports BBC.
The Pentagon confirmed he was killed "at the direction of the president".
Gen Soleimani was being driven by car at Baghdad airport, alongside local Iran-backed militias, when he was hit by a US air strike.
Iran's Supreme Leader Ayatollah Ali Khamenei said "severe revenge awaits the criminals" behind the attack.
He also announced three days of mourning.
Gen Soleimani was a major figure in the Iranian regime. His Quds Force reported directly to Ayatollah Ali Khamenei and he was hailed as a heroic national figure.
But the US has called the commander and the Quds Force terrorists, and holds them responsible for the deaths of hundreds of US personnel.
US President Donald Trump tweeted an image of the American flag after the news broke.
Global oil prices meanwhile soared more than 4% in the wake of the strike.
US media reports say Gen Soleimani and officials from Iran-backed militias were leaving Baghdad airport in two cars when they were hit by a US drone strike near a cargo area.
The commander had reportedly flown in from Lebanon or Syria. Several missiles reportedly struck the convoy, and at least five people are thought to have died.
Iran's Revolutionary Guards said Iraqi militia leader Abu Mahdi al-Muhandis was among those killed.
A Pentagon statement said: "At the direction of the President, the US military has taken decisive defensive action to protect US personnel abroad by killing Qasem Soleimani."
It added: "This strike was aimed at deterring future Iranian attack plans. The United States will continue to take all necessary action to protect our people and our interests wherever they are around the world."
The drone strike comes days after protesters attacked the US embassy in Baghdad, clashing with US forces at the scene. The Pentagon said Gen Soleimani approved the attacks on the embassy.
Iran's Foreign Minister, Javad Zarif, called the attack an "act of international terrorism", tweeting that the US "bears responsibility for all consequences of its rogue adventurism."
Mohsen Rezaei, the former commander of the Revolutionary Guards, said Iran would take "vigorous revenge on America". A spokesman for the Iranian government said the country's top security body would meeting in a few hours to discuss the "criminal act of attack".
From 1998, Maj Gen Qasem Soleimani led Iran's Quds Force - an elite unit in Iran's Revolutionary Guards, which handles clandestine operations abroad.
Iran has acknowledged the role of the Quds Force in the conflicts in Syria, where it has advised forces loyal to President Bashar al-Assad and armed thousands of Shia Muslim militiamen fighting alongside them, and in Iraq, where it has backed a Shia-dominated paramilitary force that helped tackle IS.
These conflicts turned the once-reclusive Gen Soleimani into a something of celebrity in Iran.
The Trump administration has alleged that the Quds Force is "Iran's primary mechanism for cultivating and supporting" US-designated terrorist groups across the Middle East - including Lebanon's Hezbollah movement and Palestinian Islamic Jihad - by providing funding, training, weapons and equipment.
US Secretary of State Mike Pompeo designated Iran's Revolutionary Guards and its Quds Force as a foreign terrorist organisation in April.