The crash could deliver a crippling blow to the space tourism business of the British entrepreneur.
More than 700 customers, including a host of celebrities such as Leonardo DiCaprio, Russell Brand, Katy Perry and the scientist Stephen Hawking have so far put down their deposits on a $250,000 ticket for a two-and-a-half hour voyage that will feature about six minutes of weightlessness just outside the atmosphere, about 60 miles above the Earth.
Sir Richard has long said that he intended to be on the first passenger trip into space and he recently gave next March as the deadline for that flight.
One witness, an aerospace blogger named Doug Messier tweeting under the name @spacecom said: "The ship broke apart and started coming down in pieces over the desert ... We started seeing clouds of dirt where pieces of the ship came down. One after another. At least three."
"We drove to one of the debris sites. Debris from the ship was scattered all over the road."
“Saw one of crash sites. Body still in seat.
This is the latest setback for the Virgin Galactic project, which has been dogged by delays with the prospect of taking passengers into space receding into the distance.
The test flight was being conducted by Virgin Galactic’s partner, Scaled Composites. The WhiteKnight Two mother craft took off with the spaceship attached and reached a height of about 50,000 feet after 45 minutes, as scheduled.
The spaceship was then released from the mother ship and the pilots fired up the engines to begin the test. The rockets lit up initially, but then stopped after just a few seconds, according to witnesses on the ground.
The motors restarted but the craft exploded almost immediately, sending pieces of the rocket scattering across a huge debris field.
Space Ship Two was tracked on Flightradar24 (@flightradar24/twitter)
Photographer Ken Brown, who was covering the test flight, told NBC News that he saw a midflight explosion and later came upon SpaceShipTwo debris scattered the desert.
Virgin Galactic restarted the test flight programme after engineers switched the plane's fuel mixture from a rubber-based compound to a plastic-based mix in hopes that the new formulation would boost the hybrid rocket engine's performance.
The accident is the second this week for a commercial space company. On Tuesday, an unmanned Orbital Sciences Antares rocket exploded 15 seconds after lift-off from Wallops Island, Virginia, destroying a cargo ship bound for the International Space Station.
SpaceShipTwo, a six-passenger, two-pilot spacecraft, was aiming to make the world's first commercial suborbital space flights.
Sir Richard Branson rejected claims by critics after the latest delay in lift-off that his Virgin Galactic commercial spaceship business will never make it off the ground in an interview with the Telegraph last month.
“I’ve joked that this really is rocket science and it’s proven much more difficult than we had ever expected,” he said.
“The fact is that mother ship is working great, the spaceport in New Mexico looks great, but the thing that has held us up is the rockets for the spaceship.
“We have faced a lot of criticism for being late, but we cannot rush these things and we are building a business that is offering return tickets,” he said, putting the emphasis on the word “return”.
“We have to feel completely confident about sending people into space. We’re going to take them up and bring them back.”
NBC News, which was covering the test, reported: “The latest test got off to a slow start. SpaceShipTwo spent more than three hours on the Mojave runway, slung beneath its WhiteKnightTwo mother ship, while the ground team assessed whether the weather was right for flight. The go-ahead was finally given for take-off at 9:19am Pacific Time.”
The disaster was the second fatal accident for Virgin Galactic. In July 2007 the rocket’s commercial propulsion system exploded killing three workers at the commercial spaceport in the Mojave desert.
It is all a far cry from 2003 when, convinced there was a market for space tourism, Sir Richard Branson registered the name Virgin Galactic in 2003.
While some questioned the viability of the scheme, he was bullish about the project.
“We hope to create thousands of astronauts over the next few years and bring alive their dream of seeing the majestic beauty of our planet from above, the stars in all their glory and the amazing sensation of weightlessness,” he said in September 2004.
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