Marco Simoncelli, 24, had his helmet knocked off in the collision, which happened on turn 11.
"Despite their efforts, Marco sadly succumbed to his injuries at 4:56pm local time," MotoGP said in a statement on its website.
"Everybody involved in MotoGP extends its deepest condolences to Marco's family, friends and team at this tragic loss."
The race at a steamy Sepang circuit was immediately red-flagged and organisers later announced it had been cancelled.
Ironically it was the circuit where Simoncelli experienced his finest hour - a third-placed finish to clinch the 250cc title on October 19, 2008.
Edwards also fell but escaped serious injury, while Rossi was able to return to the pits.
After the crash, restless fans upset with the lengthy delay showered the track with water bottles and other debris.
The last fatal crash in the world motorcycling championship was last year when Japan's Shoya Tomizawa was killed.
Australian Casey Stoner, who claimed the 2011 championship at Phillip Island last week, admitted immediately after the crash he had feared the worse.
"As soon as I saw the footage it just makes you sick inside," he told BBC2.
"Whenever the helmet comes off that's not a good sign."
After Simoncelli's death was announced, Sepang Circuit chairman Mokhzani Mahathir told reporters: "You can never guarantee a 100 per cent safe race.
"You expose yourself to danger when you race. As professionals, they know MotoGP is dangerous. Believe it or not, that is what they live for. Our condolences to Marco. He will be missed dearly."
Simoncelli's death quickly sparked an outpouring of grief in Italy, where officials announced sports events in the country would observe a minute's silence.
Tributes came in from his fellow riders.
British MotoGP rider Cal Crutchlow wrote on Twitter: "RIP Marco Simoncelli ! A great rider and all round nice guy. My thoughts are with all his family & friends. I will never forget today.''related search:
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