Witnesses said Salman Taseer, 56, the governor of Punjab province, was killed by a gunman in a police uniform at a small market close to his home in the capital.
His death is the most high-profile political assassination since the murder of Benazir Bhutto, the former prime minister, in December 2007.
Last night the government appealed for calm as members of Taseer’s Pakistan People’s Party staged demonstrations in the Punjab city of Multan.
The country’s government is already on the brink of collapse, following the defection of a key coalition ally, and further unrest would deepen the sense of political crisis.
Eyewitnesses said Taseer was a familiar figure at Kohsar Market, an arcade popular with expat aid workers, diplomats and journalists.
“We saw him walking to Kohsar Market like he always does when he is in Islamabad,” said a security guard close to Taseer’s home. “We always thought it was risky, given who he was.
“Then later when he was leaving the place, we saw a man in uniform – just one – shooting at him.”
Five other people were injured as security guards responded to the attack.
The shooting left blood stains on the road just outside the arcade, which was sealed off as police searched for evidence.
Rehman Malik, the country’s Interior Minister, told reporters that the suspect in the case – named as Malik Mumtaz Qadri, a member of the Punjab Police Elite Force – had surrendered to officers and told them he killed Taseer because “the governor described the blasphemy laws as a black law”.
Taseer started his career as a chartered accountant and entered politics in 1988. He was close to President Asif Ali Zardari and was appointed governor of Punjab two years ago, becoming known for his outspoken views – often posted on twitter, where he frequently took on his critics.
In the past two months he had received dozens of death threats for taking up the case of Asia Bibi, a Christian woman sentenced to death for insulting the Prophet Mohammed. He championed her cause, taking her case to the president, and led calls for reform of the blasphemy laws.
Hardline religious leaders accused him of being a pawn of the West and warned he would face a fatwa if he continued his campaign.
However, in an interview with The Daily Telegraph at the end of last year, he said he was determined not to back down.
“I have a lot of support for changing the blasphemy laws – except for this small fringe of lunatics that have singled me out,” he said.
“People were afraid to discuss it before, but now everyone is talking about this inequality.
“These people won’t stop me.” The issue has divided a country where a small, secular elite fears provoking the wrath of conservative clerics. His death will be viewed as a setback for liberal Pakistan.
Politicians paid tribute to his work tackling inequality.
Farahnaz Ispahani, a spokeswoman for President Zardari, said: “He was the most courageous voice after Benazir Bhutto on the rights of women and religious minorities.
“God, we will miss him.”