He had been ill in hospital. A spokesperson for the Diocese of Derry said his family was at his beside.
A native of Belleek in County Fermanagh, he was 82.
The image of the then Fr Daly waiving a handkerchief, as one of the victims of Bloody Sunday was carried to safety, was one of the most enduring images of the Troubles.
He was then a 39-year-old curate at St Eugene’s Cathedral in Londonderry having been a priest in the city since June 1962.
He was appointed Bishop of Derry in 1974, retiring from that role in 1993.
He was forced into full retirement in 1994 after he suffered a stroke but he continued in the role of chaplain to Derry’s Foyle Hospice until February, 2016.
He made headlines in 2011 when he said there needed to be a place in the modern Catholic Church for a married priesthood.
He addressed the controversial issue in his book about his life in the church, A Troubled See.
Bishop Daly said allowing clergymen to marry would ease the church’s problems.
He received the Freedom of the City of Derry in 2015.