The chairman of Afghanistan's High Peace Council, former president Burhanuddin Rabbani, was killed in an attack on his home in Kabul this afternoon, a senior police official said.
Mr Raggani had been tasked with trying to negotiate a political end to the war.
"Rabbani has been martyred," Mohammed Zahir, head of the Criminal Investigation Department of the Kabul Police, told Reuters.
His home is in Kabul's heavily guarded diplomatic enclave, and the attack came just a week after a 20-hour siege at the edge of the area sometimes known as the "green zone".
A police source said Masoom Stanekzai, a senior advisor to President Hamid Karzai, was badly injured in the attack.
Taliban spokesman Zabihullah Mujahid claimed responsibility, saying the killer had gone to Mr Rabbani's home for talks.
"As soon as Rabbani came three steps forward to hug Mohammad Masoom, he triggered his explosive-filled jacket killing Rabbani, (another) Taliban militant Wahid Yar and four security guards present at the house," he told Reuters.
Commander of the International Security Assistance Force in Afghanistan, General John R. Allen, called the killing "another outrageous indicator that, regardless of what Taliban leadership outside the country say, they do not want peace, but rather war".
President Karzai, at the start of talks with US President Barack Obama on the sidelines of the UN General Assembly, said Mr Rabbani's death "will not deter us" from continuing the quest for peace.
Mr Karzai, meeting Mr Obama for the first time since the US president announced a troop drawdown plan earlier this year, planned to cut short his New York visit to return home.
"It is a tragic loss," Mr Obama said with Mr Karzai at his side. "We both believe that despite this incident, we will not be deterred from creating a path whereby Afghans can live in freedom, safety and security and prosperity."
"It is going to be important to continue the efforts to bring all of the elements in Afghanistan society together to end the senseless cycle of violence," he said.
Mr Rabbani, a former leader of a powerful mujahideen party during the Soviet occupation of Afghanistan in the 1980s, was chosen last October by Karzai to head the High Peace Council.
His plan included offering amnesty and jobs to Taliban foot soldiers and asylum in third countries to leaders.
The assassination comes after a series of suicide bombings and other major attacks believed to be the work of the Haqqani network, a Taliban-allied insurgent faction based along the Afghanistan-Pakistan border.
One analyst said the peace council had not been seen as effective and that Mr Rabbani himself was viewed by many as an impediment to a deal because he was so loathed by the Taliban.
"But, his assassination might mean that the networks Rabbani led or influenced within Afghanistan .... may resist a deal with the Taliban even more," said Caroline Wadhams, a security expert at the Center for American Progress in Washington.
"It could make it that much more difficult to get greater buy-in from key Afghan leaders, who have been deeply sceptical of talks with the Taliban for some time."
Vali Nasr, a former senior official in the State Department's Afghanistan/Pakistan office, said: "The Taliban wants to send a very powerful message that the Karzai government is not in charge."
"That is important because people begin to waver and shift their allegiances ... And it makes it very difficult to say the Taliban is serious about negotiations if they keep killing people they should be negotiating with," Mr Nasr said.
Rabbani served as president in the 1990s when mujahideen factions waged war for control of the country after the Soviet withdrawal.
As a leading figure among Tajiks, the second largest ethnic group in Afghanistan, there were also concerns his death could worsen ethnic tensions.
Reuters