Australia team doctor Peter Brukner said he passed away in hospital, never regaining consciousness.
Hughes, who also played for Hampshire, Middlesex and Worcestershire, was hit by a delivery from bowler Sean Abbott.
"It's an understatement to say we're completely devastated," said Cricket Australia boss James Sutherland.
"The word tragedy gets used too often in sport, but this freak accident is a real life tragedy."
Australia captain Michael Clarke read out a statement on behalf of the Hughes family at a news conference held at St Vincent's Hospital, where the player, who would have been 26 on Sunday, was treated.
Speaking on behalf of parents Greg and Virginia, sister Megan and brother Jason, he said: "We're devastated by the loss of our much-loved son and brother, Phillip. It's been a very difficult few days.
A clearly emotional Clarke then stood up and left the room.
Hughes, batting for South Australia, collapsed face first on the ground after being hit by a bouncer from 22-year-old Abbott during a Sheffield Shield game against New South Wales.
Hughes had been wearing a helmet but the ball struck him at the top of the neck, causing the injury.
He had CPR and mouth-to-mouth resuscitation at the ground before being taken to St Vincent's Hospital, where he had a 90-minute operation to relieve pressure on his brain.
Abbott and members of the Australian national team, including Clarke, visited Hughes in hospital.
But his death was confirmed in a statement on Thursday.
"It is my sad duty to inform you that a short time ago Phillip Hughes passed away," said Brukner.
"He never regained consciousness following his injury on Tuesday.
"He was not in pain before he passed and was surrounded by his family and close friends.
"As a cricket community, we mourn his loss and extend our deepest sympathies to Phillip's family and friends at this incredibly sad time.
"Cricket Australia kindly asks that the privacy of the Hughes family, players and staff be respected."
Speaking at the news conference, Brukner explained that Hughes had died as a result of "vertebral artery dissection".
He said the artery had been compressed, causing it to split and leading to a "massive bleed" into the brain.
Brukner said the injury was "freakish", adding: "Vertebral artery dissection is incredibly rare. If you look in the literature, there is only 100 cases reported. There is only one previous example caused by a cricket ball."
Dr Tony Grabs, who treated Hughes at St Vincent's, said scans had shown that the stricken cricketer needed surgery quickly to help get the pressure down in the brain.
"He had extensive surgery to remove some of the skull from around his brain to help allow the brain to expand," added Grabs.
However, his recovery did not go as hoped.
"Over a period of the first 24 to 48 hours, he did not make very much improvement and unfortunately, as a consequence of the injury, he died,'' said Brukner.
England batsman Nick Compton, whose friendship with Hughes was forged when the pair played cricket together in Sydney, said the cricketer had a "huge impact" on his career.
"He was a very, very close friend of mine," said Compton, who shared a house with Hughes when the Australian played for Middlesex in 2009.
"He was a cheeky, funny, positive guy. Looking back, I feel like he's made the most of his 25 years and it breaks my heart to think of a guy who I certainly thought would go down in the record books as one of the better run-scorers in Australian cricket.
"I think everyone who played with him found him a complete revelation. He was a fantastic player, a real run-getter from a young age and he was really exciting."
The England team also released a statement on Twitter, writing: "Our deepest sympathies go out to Phil Hughes' family, friends and team-mates at this incredibly sad time.
"Phil was admired and respected by all he played with and against and will never be forgotten by the cricket community."
Giles Clarke, the England and Wales Cricket Board chairman, said Hughes was "an extremely popular and hugely respected cricketer in England and Wales" and "will be missed throughout the world of cricket".
Former England star Kevin Pietersen said Hughes was "growing and maturing into a magnificent cricketer".
"He was on course to do some really great things for Australia," he said. "He had a brilliant start to his career, it's just such a sad loss."
Indian icon Sachin Tendulkar, who played alongside Hughes in the Indian Premier League, added: "Shocked to hear about Phil. Sad day for cricket. Deepest condolences to family, friends and well wishers. RIP."
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Source [BBC News]: http://www.bbc.com/sport/0/cricket/30219440