The police had no immediate comment on the death of Khalid al-Junaid, a 42-year-old activist the separatists describe as a main organizer of the protests against the northern government.
Once-independent Southern Yemen was united with the north in 1990.
An attempt to break away from the union in 1994 was ruthlessly crushed by the army of former President Ali Abdullah Saleh.
The south complains of negligence and the centralization of power in the impoverished country's north.
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In October, protesters took to the streets in the south to press their demands.
Radfan al-Dubeis, a spokesman for the separatist movement, said police tried to stop al-Junaid's car, then quickly fired at it and hit him in the chest.
The police transferred him to a local hospital where he was pronounced dead.
A picture of al-Junaid on his movement's Facebook page shows what appears to be a large bullet hole on the left side of his chest.
Al-Junaid was released from prison late last month after a presidential pardon following his arrest on accusations he was behind the unrest in the south.
Yemen is embroiled in unrest.
Shiite rebels have challenged the central government's authority, taking control of the capital Sanaa and other provinces, demanding more say in running the country's affairs.