The stricken aircraft exploded into flames after hitting the crane, on top of a tower block by the River Thames, before crashing into a street during rush hour.
Burning wreckage and aviation fuel covered the road as witnesses reported seeing cars on fire and hearing people screaming.
The Metropolitan Police said two people died at the scene and two had been taken to hospital.
London Fire Brigade said the crash happened near Wandsworth Road in South Lambeth.
The crane was on top of a building called The Tower, in the St George Wharf development, and is billed to be one of Europe's tallest residential towers.
The building is only a few hundred metres from MI6 and is situated on a busy roundabout.
Fire and rescue services said they were taking "lots of emergency calls" as eyewitnesses described seeing grey smoke towering into the sky, close to Battersea Bridge.
Vauxhall Underground station, on the Victoria line, was closed, leading to disruption to services on the line.
Road congestion spread out from the scene of the crash - reaching Clapham, Kennington, Wandsworth, Lambeth and Battersea.
Some took to Twitter to report details. One said the aircraft appeared to have hit a crane on a newly-built tower block on the south bank of the Thames. It crashed close to a railway line and a branch of Sainsbury's.
London Fire Brigade confirmed that the crane at the St George's Wharf development appeared to have been left "in a precarious position".
Video footage shot on a mobile phone showed an entire road blocked by burning wreckage and aviation fuel.
The side of a building on one side of the street was also damaged by the flames.
Passers-by stood watching as the wreckage burned. A motorcycle was also lying on its side in the road where it was abandoned.
Commuter Sherna Noah described seeing a "large plume of dark grey smoke" as she crossed Battersea Bridge at around 8am.
She said: "I was coming across the bridge and basically I could see a few cyclists on the bridge looking towards the water.
"I looked over to see what they were looking at and could see a pall of grey smoke coming from the south side. You could see a large plume of dark grey smoke."
The incident caused gridlock as roads were closed at the height of the rush hour.
Visibility was apparently low with London City Airport in Docklands reporting delays. The top of the tower block was obscured by mist.
Paul Ferguson, who was working in an office near the incident,said: "There was a flash and the helicopter plunged to the ground. It exploded and you can imagine the smoke coming out of it.
"It was probably heading from the nearby heliport. It may be that on this misty morning the lights on nearby St George's Tower weren't on and it moved and clipped the edge of the crane and lost control."
Eyewitness Chris Matthison added: "There was some damage to the crane. It's possible the crane is lying across Nine Elms road. The top of the nearest building is steeped in mist and difficult to see."
He added: "I heard a very unusual dull thud, then there was silence. The silence really took my imagination. Emergency services responded very quickly."
Erin Rogers was waiting at a bus stop outside Vauxhall station. He said: "It was a bit surreal actually. I just had a coffee in my hand, I looked up, heard a bang and saw bits of crane debris falling to the floor.
"Then the helicopter was in flames. The rest of the people at the bus station were looking on going 'What was that?'. It's something I will never forget for a long time."
Sarah-Beth Casey lives in an apartment near the incident. She said: "You're always worried about things like 9/11 and things like that. I have three small children with me in the flat. It's one of your fears that something like this can happen.
"When I heard the explosion - it was like a little earthquake."
She went on: "It was like a gas explosion. I looked up to see debris falling off the tower."
She added: "I can't see any people on the ground, it seems to be a lucky escape. The police and ambulance response was incredible."
Matt Haverson was doing construction work on railway arches near the incident. He said there was a good "pull together" with people attempting to extinguish small fires and escort other people away.
He said: "It was extremely scary... I obviously thought it was a terrorist attack."