The famous musician is reported to have been playing with his children on the beach in Cancún, where he owns a property, when he suffered a fatal heart attack on Wednesday morning.
Sources say that he was taken to hospital but died before arrival.
Born Francisco Sanchez Gomez, the flamenco giant was credited with modernizing the Spanish gypsy tradition with jazz and bossa nova influences during a decades-long career.
Algeciras mayor Jose Ignacio Landaluce called his death an "irreparable loss for the world of culture and for Andalusia," Spanish media reported, as the town declared an official mourning period.
Born of humble origins in the southern Spanish region on December 21, 1947, Paco de Lucia rose into a musical giant who blended jazz, pop and classical influences with the folk tradition of flamenco.
He credited his father, a singer of gypsy origin, with introducing him to music.
"The gypsies are better since they listen to music from birth. If I had not been born in my father's house I would be nobody. I don't believe in spontaneous genius," he once said.
"My father made me play guitar when I was little," he explained in his book: "Paco de Lucia: A new tradition for the flamenco guitar".
From the age of just 12 de Lucia was playing and earning at flamenco "tablaos" in usually intimate, smoky venues.
By 15 he had graduated to making recordings in Madrid and by 18 he had brought out a first album.
He became famous for playing with the singer Camarón de la Isla in the 1970s.
The guitarist also performed with colleagues John McLaughlin and Al di Meola in the famous 1981 Friday Night in San Francisco concert — which went on to become what is considered one of the the most influential acoustic guitar albums of all time.
Paco de Lucía performs with John McLaughlin and Al di Meola.
In 2004, he was awarded Spain's prestigious Asturias Prize for Art as the "most universal of flamenco artists".
"His style has been a beacon for young generations and his art has made him into one of the best ambassadors of Spanish culture in the world," the jury said at the time.
Paco de Lucia based himself for many years in Mexico, but in later years had returned to Toledo, a small city outside Madrid.