Denis Donaldson, 55, who was banished from Northern Ireland's largest Catholic party after his confession last December, was found dead in County Donegal, in north-west Ireland.
The death comes ahead of a scheduled visit by British Prime Minister Tony Blair and his Irish counterpart Bertie Ahern to Armagh in Northern Ireland on Thursday.
The pair were to launch a new road map for the suspended assembly in the British-governed province, which shared power between majority Protestants and Catholics.
The former spy's body was discovered by a neighbour at 5pm (0200 Wednesday AEST) in the run-down cottage in Doochary, near the village of Glenties, which had been his home since his expulsion.
The admission by Donaldson, Sinn Fein's head of administration that he had worked as a British double agent for two decades, sent shockwaves across Ireland.
IRA denial
"The IRA had no involvement whatsoever in the death of Denis Donaldson," it said in a brief statement.
Sinn Fein president Gerry Adams said he spoke to the victim's family before news of the death broke.
"I want to disassociate Sinn Fein and all republicans who support the peace process from this killing," he said. Mr Adams would not speculate on who might have been responsible.
"Denis Donaldson worked for the Special Branch, who ruthlessly used him to collapse a democratically elected government. Last year, they were about to publicly expose him in a further effort to destabilise the process.
"It is likely that his death at this time is intended to undermine current efforts to make political progress. Those who carried out this murder are clearly opposed to the peace process."
Ian Paisley, the Protestant firebrand leader of Northern Ireland's largest party, the Democratic Unionist Party (DUP), told Channel Four television: "I have heard that his hand was chopped off in this murder".
"We don't know who has done this but the finger must be pointed towards those who were angry at what this man had done."
Life in danger
Irish Justice Minister Michael McDowell has said that Donaldson had extensive damage to his right arm. He said Donaldson was last seen by the Irish police in Donegal last night.
Mr McDowell's government called it a "brutal murder" and "callous", while Britain's Northern Ireland minister Peter Hain said he was "completely appalled by this barbaric act".
Irish police sealed off the area as forensic experts were called in to carry out an inspection. A pathologist was called to the scene to undertake a post-mortem examination.
Denis Donaldson was a respected Sinn Fein member of more than 30 years. His confession came just a week after he and two other men were cleared of charges of spying for the IRA on the British government at Stormont, the seat of the devolved Belfast administration.
The charges were dropped when the trial no longer seemed to be in the public interest due to lack of evidence. That spying scandal, known as "Stormontgate", led to the suspension in 2002 of the regional assembly and the restoration of direct rule from London.
Mr Adams said in December that Donaldson came clean on the spying to two party members because he was about to be unmasked and police had told him his life was in danger.