Mohammad Ali Baryalei is believed to have recruited scores of Australians to fight with IS in the Middle East.
He was also accused of being behind a plot to carry out "demonstration killings" in Sydney.
Foreign Minister Julie Bishop said the government was seeking to verify the reports.
"I can't confirm it at this stage," she told reporters at a function in Canberra.
Mr Baryalei had reportedly been working for IS on the Turkey-Syria border, facilitating the passage of volunteer fighters into Syria.
Australian media reported on Wednesday that a Sydney friend of Mr Baryalei who is now living in Syria posted on Facebook on Tuesday night that the jihadist had been "martyred".
"I've just received the news that our beloved brother Mohammad Ali who was recently strongly attacked by Australian media has been martyred," the post reportedly said.
The Australian government has issued a warrant for Mr Baryalei's arrest.
Ms Bishop said that if the reports were verified, the government would be "unrelenting" in tracking down details of who Mr Baryalei had been in contact with, where he had been overseas and who he had telephoned.
Australia's biggest ever counter-terrorism raids carried out in Sydney and Brisbane last month are said to have been linked to an intercepted phone call involving him.
Mr Baryalei, a former Sydney bouncer and part-time actor, is said to have encouraged IS sympathisers in Australia to behead a randomly-selected member of the public.
New laws
The reports of Mr Baryalei's death come as the government's "foreign fighter" laws passed the Senate.
The new laws will allow the government to suspend passports at short notice and make it an offence to travel to certain areas without a valid reason.
Parliament's human rights committee on Tuesday warned that the bill was likely to breach Australians' human rights.
However, Ms Bishop said the rights in the forefront of the government's mind were those of Australians at risk from terrorists and the rights of minority groups in Iraq and Syria who were being attacked by terrorists.
"We are seeking an appropriate level of power and authority... so that we can keep Australians safe," she said.
"The tragedy is that a number [of young Australians] will be killed, in fact a number of them have been killed in Syria. We urge young Australians not to be radicalised... and not to break Australian law to take up arms with Isil [IS]."
The legislation now goes before the lower house, where the government has a majority.
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