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 being 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.
Clarke reads statement on behalf of the Hughes family
We appreciate all the support we have received from family, friends, players, Cricket Australia and the general public.
"Cricket was Phillip's life and we as a family shared that love of the game with him. We would like to thank all the medical and nursing staff at St Vincent's Hospital and Cricket New South Wales medical staff for their great efforts with Phillip. We love you."
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 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.
Members of the Australian national team, including Clarke, visited Hughes in hospital.
But his death was confirmed in a statement on Thursday.
The doctor said artery had been compressed, causing it to split and leading to a "massive bleed" into the brain.He 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."
The Australian flag was lowered to half-mast over the Sydney Cricket Ground where Hughes suffered the horrific injury. Flags were also lowered at the iconic Melbourne Cricket Ground.
Australian Prime Minister Tony Abbott paid tribute to Hughes, describing him as "a young man living out his dreams".
"His death is a very sad day for cricket and a heartbreaking day for his family. What happened has touched millions of Australians," he said.
"For a young life to be cut short playing our national game seems a shocking aberration. He was loved, admired and respected by his team-mates and by legions of cricket fans."
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."
Cricket Australia had already decided to abandon the latest round of Sheffield Shield matches following the injury to Hughes.
After his death was announced, cricket officials from Pakistan and New Zealand chose to postpone the second day's play in the third and final Test between the two countries.
"It's a sad day for cricket," Pakistan Cricket Board chairman Shaharyar Khan said in a statement.
New Zealand Cricket chief executive David White added: "Cricket is a family. Quite apart from its super-competitive edge, it is a game of kinship, mateship and friendship; of camaraderie and community."
A two-day tour match between a Cricket Australia XI and India, scheduled to be played in Adelaide on Friday and Saturday, has been cancelled.
The death of Hughes has inevitably sparked further discussion about player safety in cricket and the use of helmets.
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