The UAE's defence minister and world renowned racehorse breeder Sheikh Maktoum succeeded his elder sibling, who was also vice president and prime minister of the United Arab Emirates.
Sheikh Maktoum bin Rashid al-Maktoum died in a luxury hotel on Queensland's Gold Coast. He was in his early 60s and had suffered heart problems.
"The UAE has today lost a historical leader who dedicated his life to building the nation and doing good for its people," a statement from the UAE presidency said.
The UAE is a federation of seven emirates which include Dubai.
Each emirate has a separate ruler and heir apparent, who preside over a local government.
Racing Sheikh
Internationally, the brothers had been well known as co-owners of Dubai's Godolphin stables which compete in major horse races.
The younger brother had the higher profile of the two in racing circles and spent several weeks a year in Britain.
At home, the elder Maktoum maintained a low profile, preferring to allow his younger brothers to run the day-to-day affairs of Dubai, the Gulf region's trade and tourism hub.
"In his quiet way, Sheikh Maktoum was a pillar of the federation," Anthony Harris, a former British ambassador to the UAE said.
"He ... was remarkable for an Arab leader because he allowed his younger brothers to have a higher profile."
The new ruler has been credited with presiding over Dubai's transformation into a hub for trade, finance, property and tourism, marked by opulent shopping malls and futuristic architecture, to wean itself off dwindling oil reserves.
The capital Abu Dhabi holds most of the oil wealth of the UAE, a member of the Organisation of the Petroleum Exporting Countries.
Economists said they did not expect Sheikh Maktoum's death to impact on Dubai's booming economy.
"I don't see too many changes. In recent years his (Sheikh Maktoum's) role was very limited as an active maker of policy," said Simon Williams at the Economist Intelligence Unit.
"His brother Sheikh Mohammed has been the real driving force."
Trading halted
The UAE's main stock markets halted trading after the news was announced.
The Dubai Gold and Commodities Exchange said it would close for a week from Thursday.
Officials said UAE President Sheikh Khalifa bin Zayed al-Nahayan would also soon appoint a new prime minister and vice president for the Gulf Arab state to succeed Sheikh Maktoum.
Sheikh Maktoum's body would arrive in Dubai for burial on Thursday, Dubai's official WAM news agency said.
His remains left Brisbane's airport just after 11pm (AEDT) on Thursday for the 13-hour journey to his Gulf state.
The UAE declared 40 days of mourning and state institutions will close for a week.
Condolences poured in from leaders around the world.
German Chancellor Angela Merkel said the country had lost a friend. Egyptian Prime Minister Ahmed Nazif will attend the funeral.
"Sheikh Maktoum's accomplishments and his striking contributions to Dubai and the UAE's development will be everlasting in everyone's mind," said W David Hutton, Canada's ambassador to the UAE.
Sheikh Maktoum officially took over as ruler of Dubai in 1990, when his father Sheikh Rashid died after a long illness.