The rebels' Donetsk News Agency said Mikhail Tolstykh, better known under his nom de guerre Givi, died this morning in what it described as a terrorist attack.
The agency said 35-year old Tolstykh was killed by a rocket fired from a portable launcher into his office.
Russian state television showed pictures of firefighters putting out flames in the building where Toltsykh's headquarters is believed to be. The footage from the scene showed several rooms in the building gutted from an apparent explosion.
Yuri Tandit, an adviser to the chairman of the Ukrainian Security Service in Kiev, said on the 112 television channel that his agency was looking into the reports.
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Tolstykh was one of the most recognizable faces in the conflict between Ukrainian government troops and Russia-backed rebels which has claimed more than 9,800 lives since it began in 2014.
Killings of high-profile commanders in Ukraine's Donbass began in May 2015 with the bombing of the charismatic Alexei Mozgovoi.
The very existence of unruly commanders like Givi bolstered the Ukrainian government's long-standing refusal to negotiate with what it regarded as terrorists. Givi and other warlords who have been killed in the past two years have publicly assaulted prisoners of war and been engaged in what can be classified as war crimes.
While the unruly commanders were dying in car bombings, the leadership of the rebel-controlled parts of the Donetsk and Luhansk regions came to be dominated by bureaucrats with ties to ousted pro-Russian President Viktor Yanukovych, a Donbass native, rather than the commanders who led the uprising.
Dmitry Peskov, spokesman for Russian President Vladimir Putin, described Tolstykh's death as an attempt to "destabilize the situation" in eastern Ukraine after flare-up of hostilities last week killed more than 33 people. Peskov denied any Russian involvement in the warlord's death, calling it impossible.