Javier Valdez, 50, was shot near the premises of Riodoce, a Mexican news weekly he founded, in his hometown of Culiacan in northwestern Sinaloa state, the source said.
Valdez was the fifth journalist killed this year in a country plagued by drug violence and corruption, according to officials and media rights groups.
"We are horrified by this tragedy and send our condolences to Javier's family and those close to him," said AFP's global news director Michele Leridon.
"We call on the Mexican authorities to shed all possible light on this cowardly murder," she added.
"Javier showed extreme courage by spending years investigating the powerful drug cartels in Mexico, knowing that he was risking his life in doing so."
President Enrique Pena Nieto said on Twitter that he had ordered an "investigation of this outrageous crime."
Risking his life
Valdez's brother Rafael said the reporter had been "very happy" in recent days and had not indicated that he had received threats.
"He was very reserved when it came to his work. He never talked about it so as not to drag people into it," Rafael Valdez told AFP.
"I asked him several times whether he was afraid. He said yes, he was a human being. So I asked him why he risked his life and he replied: 'It is something I like doing, and someone has to do it. You have to fight to change things.'"
The court source said forensic investigators were analyzing the crime scene.
Mexico ranks third in the world for the number of journalists killed, after Syria and Afghanistan, according to media rights group Reporters Without Borders (RSF).
The US-based Committee to Protect Journalists (CPJ) this month said "Mexico's press is caught in a deadly cycle of violence and impunity."
Violence - including killings of journalists - surged in Mexico after the government launched a military campaign against drug gangs a decade ago.
In response to that, Valdez founded Riodoce with two colleagues.
It became a key source of news about the drug war in a state where other media self-censored for fear of violence.
Living in danger
Over a nearly 30-year career, Valdez became one of the most renowned journalists in Sinaloa.
The state is home to one of Mexico's most notorious drug cartels.
"Being a journalist is like being on a black list," Valdez said at a launch of his last book about drug gangs.
"Even though you may have bulletproofing and bodyguards, (the gangs) will decide what day they are going to kill you."
His brother Rafael said Valdez had not indicated whether he had been working on any particular investigation lately.
He had written about the Sinaloa drug cartel and its now-detained founder Joaquin "El Chapo" Guzman.
Valdez worked for the national daily newspaper La Jornada as well as Riodoce.
He had been a local contributor to global news agency AFP for more than 10 years.
He was known for his smile and white Panama hat. Journalists who worked with him said he kept his sense of humor despite the pressures of his job.
Award-winning coverage
In 2011, the CPJ gave Valdez an International Press Freedom Award for writing about the victims of the drug war.
Valdez also earned a Maria Moors Cabot award from the Columbia University School of Journalism.
Last year, he published a book about drug gangs and the media.
Mexico has seen 102 journalists murdered since 2000, according to RSF.
