Students at the mosque and its attached religious schools have waged a campaign for months pressing for Sharia law.
On Tuesday, eight soldiers also died, and some 50 women and children were freed.
Pakistan's military spokesman Gen Waheed Arshad said the battle had progressed slowly because the army was anxious to avoid casualties among the unknown number of women and children in the basement.
The few remaining militants are believed to be
holed up in the private quarters of Mr Ghazi.
Public anger in the capital had been mounting after they kidnapped policemen as well as people they considered to be involved in immoral, un-Islamic activities.
But there is also the danger of a violent reaction from members of other radical mosques, the BBC's Barbara Plett in Islamabad says.
They will almost certainly see Mr Ghazi as a martyr and his death may become a rallying point for Islamic extremists opposed to President Pervez Musharraf's rule, our correspondent says.
Islamabad, the country's capital, remains on high alert.
In recent days the army has redeployed thousands of troops in north-western Pakistan where pro-Taleban militants opposed to President Musharraf have been carrying out a string of attacks said to be linked to the mosque siege.
'Killed in cross-fire'
The troops attacked the mosque on Tuesday morning and took control of most of the complex during heavy fighting which raged as they went from room to room throughout the day.
Red Mosque siege area
Interior Ministry spokesman Javed Iqbal Cheema said Mr Ghazi was killed as troops were flushing out militants still inside a madrassa (religious school) for women and girls inside the mosque compound.
"He was spotted in the basement and asked to come out. He came out with four or five militants who kept on firing at security forces," Mr Cheema told AFP news agency.
"The troops responded and in the cross-fire he was killed."
Brig Cheema said Mr Ghazi had used a number of women and children as "human shields", although the cleric always denied taking anyone hostage.
Mr Ghazi was deputy leader of the Lal Masjid (Red Mosque). His brother, Maulana Abdul Aziz, who was head, was arrested trying to escape last week dressed in a burka. Hours before his death, Mr Ghazi accused the authorities of "naked aggression".
"My martyrdom is certain now," he told Pakistan's Geo television station.
Terrorists'
It is not clear how many people were inside the complex when it was stormed.
In addition to those killed, about 70 militants had been captured or surrendered, the army said earlier.
Security forces began a full-scale siege of the Lal Masjid last Tuesday, not long after mosque students abducted seven Chinese workers they accused of running a brothel.
The government had said it wanted to detain a number of people on a wanted list, and also a number of foreigners whom it said were inside.
Talks reportedly broke down over the militants' demand for an amnesty for all in the mosque.
The authorities said "hardcore terrorists" were inside the mosque, some belonging to Jaish-e-Mohammad, an outlawed radical Muslim organisation which has been linked to al-Qaeda.
Mr Ghazi had denied the presence of any banned extremist groups. He had said those inside were students of his religious school.
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