The legendary forward, who represented Argentina, Colombia and Spain during his stellar career, had been in critical condition after suffering a heart attack.
The club's honorary president was in a critical condition after suffering a heart attack in the street close to the Santiago Bernabeu on Saturday, just a day after his 88th birthday, and died after his health worsened dramatically Monday morning.
Di Stefano started his career at River Plate and moved to Madrid from Colombian side Millonarios in 1953, having originally been close to joining Barcelona.
The Argentine forward defined an era at the Bernabeu, leading Madrid to eight Liga titles and five European Cups from 1953 to 1964.
The "Saeta Rubia" (Blond Arrow) netted 308 times in 396 appearances for Real and remains second on the club's list of all-time top scorers behind Raul (323).
Real Madrid confirmed the news with a statement on its official website.
"Real Madrid's honorary president, Alfredo Di Stefano, passed away at 17:15 at the Hospital General Universitario Gregorio Maranon de Madrid," it read. "The president of Real Madrid, Florentino Perez, and the club's board would like to express their deepest condolences and affection to his children, family and friends.
"The club would also like to extend those condolences to everyone who has felt sadness at the loss of the greatest player of all time."