PSNI Assistant Chief Constable Mark Hamilton said a murder inquiry has been launched.
A single gunman fired shots in a residential area in Creggan, and as result Ms McKee was wounde.
The 29-year-old subsequently died from her injuries.
Mr Hamilton told a news conference: "We were in Creggan, carrying out a search operationa nd a public order situation developed in Fanad Drive.
"This public order situation saw over 50 petrol bombs throw at the police, two cars were hijacked and set on fire - then unfortunately at 11 o'clock last night a gunman appeared and fired a number of shots towards the police.
"A young woman - Lyra McKee, 29-years-old - was wounded.
"She was taken away from the scene in a police Land Rover to Altnagelvin Hospital but unfortunately she has died.
"Therefore we have now launched a murder inquiry here in the city.
"We believe this to be a terrorist act, we believe it's been carried out by violent dissident republicans.
"Our assessment at this time would be that the New IRA are most likely to be the ones behind this, and that forms our primary line of inquiry".
Leona O'Neill, who was at the scene, said she called an ambulance for the woman.
She tweeted: "I was standing beside this young woman when she fell beside a police Land Rover tonight in Creggan #Derry.
"I called an ambulance for her but police put her in the back of their vehicle and rushed her to hospital where she died. Just 29 years old. Sick to my stomach tonight."