General Qasem Soleimani, the head of the Iranian Revolutionary Guards' elite Quds Force, has been killed by US forces in Iraq, BBC reported a short while ago.
The Pentagon confirmed that he was killed "at the direction of the President.”
Gen Soleimani was being driven by car at Baghdad Airport with local Iran-backed militias when hit by an air strike.
Iran's Foreign Minister, Javad Zarif, called the move "extremely dangerous and a foolish escalation" and "an act of international terrorism".
Gen Soleimani was a major figure in the Iranian regime. His Quds Force reported directly to the country's Supreme Leader Ayatollah Ali Khamenei and he was hailed as a heroic national figure.
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.
As head of Iran's powerful elite Quds force, Qasem Soleimani was seen as the mastermind behind Iran's vast ambition in the Middle East, and the country's real foreign minister when it came to matters of war and peace.
His death marks a decisive turning point in what is already a major crisis between Iran and the US and its allies. Escalation is expected and retaliation seems certain, setting an already volatile region on an even more dangerous course.
Foreign minister Zarif called the attack an act of international terrorism. "The US bears responsibility for all consequences of its rogue adventurism," he tweeted.
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".