The killers struck on the very day that Belgrade and Pristina resumed EU-moderated talks on normalising ties after a hiatus of more than a year.
Both Serbian and Kosovo Albanian officials refrained from explicitly accusing each other of being behind the killing as the international community urged the two sides to remain calm.
Serbian President Aleksandar Vucic described the murder as a "terrorist act" against "Serbia as a whole".
Social democrat Ivanovic, 64, a father of four, was facing a retrial on war crimes charges over the 1990s Kosovo conflict.
But he was seen as a moderate politician and as favouring dialogue with Kosovo's majority ethnic Albanians.
He had publicly spoken out against Belgrade's policies in Kosovo, which Serbia still claims as a province despite its independence declaration in 2008.
A former Serbian state secretary for Kosovo, he was a key interlocutor with NATO, the United Nations and later the European Union after the war.
Drive-by shooting
Ivanovic was shot dead by gunmen firing from a car as he arrived at the headquarters of his party in the flashpoint town of Mitrovica at about 8:15 am (0715 GMT), police said.
He was hit by five bullets and died on the spot, his lawyer Nebojsa Vlajic told AFP.
Public prosecutor Shyqri Syla told AFP it was not immediately clear who was behind the attack.
Police said they found a burnt-out car that was presumably used in the shooting.
Kosovo President Hashim Thaci and the government in Pristina "strongly" condemned the assassination, as did US and UN representatives in Kosovo.
Russia warned of the "risk of contagion in an atmosphere of terror and a resurgence of interethnic conflict in the region", in a statement from the foreign ministry.
European Union foreign policy chief Federica Mogherini spoke with Thaci and Vucic and "called on all sides to show calm and restraint and allow the rule of law and justice to take its course," her office said.
After holding an emergency meeting of his national security council, Vucic told reporters Serbia needed to be "actively included in the probe".
In Pristina, Kosovo premier Ramush Haradinaj was to meet with his national security council later on Tuesday.
'Serious blow' to stability
Serbian Foreign Minister Ivica Dacic said the murder was a "serious blow" to the stability of the entire region.
"It is very important to preserve peace and stability," he told reporters in Podgorica during a visit to neighbouring Montenegro.
Following the assassination, the Serb-populated northern part of ethnically divided Mitrovica was unusually calm and its streets deserted. Dozens of citizens laid flowers and lit candles at the spot of the murder.
'Serbs afraid'
In 2016, an EU-backed Kosovo court sentenced Ivanovic to a nine-year jail term after finding him guilty of encouraging the killings of captured ethnic Albanian civilians in Kosovska Mitrovica in April 1999.
But in February last year, a Pristina appeals court quashed the sentence and ordered a retrial for Ivanovic, who had been in detention since his arrest in January 2014.
In May, he told AFP his private car had been torched in front of his home. He said it was an attempt to silence him.
Ivanovic speaks Albanian -- rare for a Kosovo Serb.
He was in October elected as a deputy on northern Mitrovica's municipal council, running against a Belgrade-backed party.
"Serbs are more afraid of Serbs than Albanians," Ivanovic said at the time. "Serb people are afraid to raise their voice" against Belgrade's policy.
Tensions remain high between Mitrovica's ethnic Albanians who number about 72,000 and the 13,000-strong Serb community.
Call for justice
The 1998-99 war between Serbian security forces and Kosovo Albanian guerrillas claimed 13,000 lives, mostly ethnic Albanians. It was ended by a NATO air campaign.
Predominantly ethnic Albanian Kosovo unilaterally declared independence from Serbia in February 2008. Belgrade rejected the move and still considers the breakaway territory as its southern province.
The Serb government official in charge of Kosovo, Marko Djuric, was in Brussels heading the delegation due to hold talks with Kosovo Albanians on Tuesday.
After the assassination, the Belgrade delegation walked out.
"Whoever is behind this attack... whether Albanian, Serb or any other criminals, they have to be punished, they have to be brought to justice," Djuric said.
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