The 26-year-old, born in London, was a passenger in a Porsche which hit the barriers during a private test session.
Edwards is currently leading the Porsche Supercup championship, a series which supports Formula 1 races.
He is the son of former F1 driver Guy Edwards, who pulled Niki Lauda out of his burning Ferrari after a crash at the Nurburgring in 1976.
Edwards was taking part in the second day of a two-day coaching session for young drivers at the track in Queensland.
The driver of the car, a 20-year-old from Brisbane, survived the high-speed crash but was stuck in the car for more than two hours.
He is currently being treated in a local hospital having sustained severe injuries and burns.
Monaco-based Edwards won the Nurburgring 24 Hours in May. Driving a Mercedes, he joined forces with Bernd Schneider, Jeroen Bleekemolen and Nicki Thiim to claim his first major victory in endurance racing.
He also played his father in Ron Howard's movie Rush, released last month, which focused on the rivalry between Lauda and James Hunt during the 1976 Formula 1 season.
Past and present drivers have expressed their shock at the news of his death.
Three-times Le Mans 24 Hours winner Allan McNish said: "I knew his father initially from his sponsorship days, so I have followed Sean's career a bit closer than you would normally do.
"The tragedy of it is he was leading the Supercup championship after such strong performances through the middle of the year. It looked like he was going to win.
"Also, having won the Nurburgring 24 Hours this year, I would say this was probably his strongest year in racing.
"He won the Porsche Supercup race in Monaco this year by 20 seconds, which is unheard of in a one-make-spec championship.
"This was a breakthrough year for him. He was showing what talent he had, but had maybe never had the opportunity to actually display it.
"Apart from that, he was a guy who loved life, loved racing, loved cycling, was strong and fit."
Former McLaren driver and BBC F1 co-commentator David Coulthard said: "Motor racing is a very tight-knit community and, although Sean was racing in the Porsche Super Cup in touring cars, it's really rocked all those in single seaters.
"A number of the Formula 1 drivers, who are also based in Monte Carlo, are familiar with Sean and were part of a training pack together.
"For someone so young, who was having a great season in motor racing having worked very hard to establish himself as a professional driver, to lose his life in such tragic circumstances is really terrible."
Marussia driver Max Chilton added on Twitter: "Truly shocked to hear the devastating news about Sean Edwards, watched him win many races and will be a huge loss to the sport."
Former Benetton, McLaren and Jordan driver Martin Brundletweeted: "Terribly sad news re the death of Sean Edwards, a very talented racer. Condolences to his family and friends. Motorsport can be too cruel."
Hartmut Kristen, head of motorsport at Porsche, said in a statement: "Our thoughts are with his family and we want to express our deepest condolences to his relatives."
The Motor Sports Association added in a statement: "Sean was a hugely promising young racer who came through the junior formulas in Britain, before making a career in international sportscar racing.
"The MSA extends its deepest sympathies to Sean's family, friends and fans at this difficult time."
Edwards had contested the Porsche Supercup series since 2008 and holds an 18-point lead in the championship ahead of the final two races at Yas Marina Circuit in Abu Dhabi next month.
He had a short career in single-seaters, competing in the Formula Renault championship, before switching his attention to GT racing.
He also competed in the FIA GT2 and GT3 series, which he won in 2006, as well as the Le Mans Series before focusing on the Porsche Supercup.
His death follows that of former F1 reserve driver Maria De Villota, who was found dead in her hotel room in Seville last week.
The 33-year-old's death was believed to have been a consequence of the injuries she suffered during a testing crash last year.
Four-time IndyCar champion Dario Franchitti also suffered a high-speed crash a week ago.
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