It is not known who shot Ansar Beit al-Maqdis commander Shadi el-Menei.
But several other members of the al-Qaeda-inspired group, which is suspected of a string of recent attacks, were also reportedly killed.
The deaths of more than 200 Egyptian soldiers and officials have been blamed on Ansar Beit al-Maqdis since President Mohammed Morsi was ousted in July 2013.
Profile: Ansar Beit al-Maqdis
There are conflicting reports as to who was responsible for the killing of the militants.
Unnamed officials were quoted by AFP news agency as saying security forces opened fire on the men as they were about to carry out an attack on a gas pipeline in central Sinai.
A different account came from officials who told the Associated Press that Shadi el-Menei and at least three associates were killed by 15 attackers in revenge for the killings of tribesmen by Ansar Beit al-Maqdis.
Islamist groups in the Sinai have stepped up their attacks against Egypt's army and police forces in the past year.
The Egyptian army launched a major operation against militants in the Sinai but attacks have continued.
However, the security operation has come at a cost to authorities. A police officer died of his wounds on Friday after being shot the previous day by militants near the border with the Gaza Strip.
Last week, two army officers and five militants were said to have died in a gunfight during a raid on a warehouse linked to Islamist militants north of Cairo.
Officials said the militants in that attack were from Ansar Beit al-Maqdis.
The US state department designated the group a "foreign terrorist organisation" earlier this year.

Belper Town FC thought everyone would realise they were joking when they advertised their next match as being against the Spanish giants.
But they received more than a dozen calls from people wanting tickets.
Even the club's caterer was taken in and started panicking about what to cook the fictitious opponents.
"I did have a bit of a panic myself because I thought 'blimey what can I feed these lads?" said Diane Collins.
"They are all into carbs, protein and veg, not like pie and chips that our footballers get."
After being told it was a joke, she said: "I was disappointed I wasn't going to see Ronaldo but never mind."
Belper Town FC play in the North Premier League Division One South - the eighth tier of the English football pyramid.
One of the club's directors, Mike Matthews, said: "Our view as directors is that Real Madrid would merely be the warm-up game for the true match tomorrow against Kidsgrove Athletic.
"We are expecting a big crowd."
The match was advertised last Tuesday and by the morning of 1 April the club had received 15 phone calls asking for tickets.
Three people also asked Mr Matthews for tickets directly - and two of those were serious.
"They were completely unaware of the date and the sheer unlikelihood of the world's most prestigious club visiting Christchurch Meadow," he said.
Egyptian security officials say a key leader of a militant group has been shot dead in the Sinai peninsula.
[NEXT_CONCEPT]
A non-league football club has been left red faced after an April Fools' Day joke about playing Real Madrid went wrong.