Details of the incident in La Linea de la Concepcion on Spain's southern tip remain unclear.
Victor Sánchez, a 46-year-old father-of-two was hit by a vehicle when he was in the process of making an arrest, Gabriel Cobos, the councillor in charge of personnel at the city hall, told reporters.
He added it looked like a police van "hit the agent" accidentally and not the vehicle it was reportedly chasing, but was unable to give further details.
La Linea Digital, an online local news website, reported that the policeman was in the process of stopping a motorbike suspected of smuggling tobacco when he was hit.
Tobacco contraband has long been an issue in La Linea de la Concepcion, with smugglers taking advantage of lower prices in the British overseas territory of Gibraltar across the border.
Drug traffickers also operate in the area in an increasingly brazen manner, attacking police and unloading their merchandise in broad daylight.
Juan Franco, mayor of La Linea, a poor city that looks onto the huge rock of Gibraltar, told AFP in April there was "a sense of total impunity."
Officials and police associations complain security forces are understaffed and under-equipped to deal with the problem, and have asked Madrid for an increase in resources to tackle the problem.
The town hall has declared three days of mourning.