Hamas said in a statement that its leader Ismail Haniyeh was killed at his residence in Tehran in a raid by Israel.
The Palestinian group controlling Gaza said that Haniyeh was "killed in a treacherous Zionist raid".
Israel is yet to respond or issue a statement.
The group said he had participated in the inauguration ceremony of the new Iranian president Masoud Pezeshkian on Tuesday.
"The Islamic Resistance Movement Hamas mourns to our great Palestinian people, to the Arab and Islamic nation, and to all the free people of the world," it added.
Most Hamas leaders keep a low public profile, while others have spent much of their lives evading assassination attempts by Israel.
Who was Ismail Haniyeh?
Ismail Haniyeh is widely considered Hamas's overall leader and has been a prominent member of the movement since 1980.
He briefly served as Palestinian prime minister - appointed in 2006, but was dismissed a year later after Hamas ousted the rival Fatah Party from the Gaza Strip in a week of deadly violence.
He was elected head of Hamas's political bureau in 2017 and the US Department of State designated him a terrorist in 2018.
He has lived in Qatar for the past several years.
Iran's Islamic Revolutionary Guard Corps (IRGC) has offered its condolences following the death of Ismail Haniyeh in Tehran.
A statement shared by its media arm Sepah news said the group was investigating "the cause and dimensions of the incident" and will announce the outcome later.
It added that Haniyeh and one of his bodyguards were "martyred".
The IRGC is a major military, political and economic force in Iran, with close ties to the supreme leader, Ayatollah Ali Khamenei.
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