The reptile, a critically endangered swinhoe softshell turtle, occupies a key mythological role in Vietnam -- in the past the turtle generally surfaced only rarely, with its sightings deemed auspicious.
Some scientists believe it was one of only four turtles -- better known as Yangtze giant softshells -- in existence. Two are in China and the other lives in a different lake in Hanoi.
It was found dead in Hoan Kiem lake in central Hanoi late yesterday, the state-run Tuoi Tre newspaper said.
Its demise was widely mourned on Vietnamese-language blogs and social media, with many warning it was a bad omen for upcoming changes in the ruling Communist Party, which begins its five-yearly congress on Thursday.
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"This is bad news for many people in Hanoi," said the Thanh Nien newspaper.
Vietnam's authoritarian rulers will choose a new party leader, president and prime minister at the party congress.
In a story taught to all Vietnamese school children, the sacred turtle of Hoan Kiem is the custodian of the magic sword of Le Loi, a 15th century rebel leader who vanquished Chinese invaders.
"I feel empty. My children, grandchildren will only know the turtle from legend," online commentator Duong Nguyen wrote on the popular VNExpress site.
Reports about the turtle's death first appeared in state media late yesterday, but some were taken down apparently under pressure from communist authorities.
The turtle's body is being kept at a temple on a small island in the lake pending an official decision on how to proceed, state media said, adding that embalming was being considered.