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.
"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 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".
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