The body of the woman, who police have yet to identify, was found in the bedroom of a ground floor flat in Harvey Street following a fire at about 4.15 am on Saturday morning.
Crews from the local Fire and Rescue service attended the property where the grim discovery was made.
Police say the victim suffered multiple injuries and believes a weapon was used during the attack.
At this stage, police believe the deceased woman was in her 40s to mid-60s.
Detective Chief Inspector Anthony Kelly of the PSNI’s Major Investigation Team said at a press conference in Strand Road police station: “From our enquires so far, we can tell you that the victim suffered an horrific attack and sustained multiple injuries.
“We know this brutal murder has caused great concern but we can assure you we are working at full pace to establish what happened and catch those responsible for this heinous and evil crime.
“You will see an increase in police presence in the city in the coming hours and days.”
DCI appealed to anyone who was in the Harvey Street area between 4 am and 5 am on Saturday and who saw any unusual activity to contact them.
They also appealed for anyone who had CCTV, doorbell or dashcam footage to do the same.
The murder inquiry has lead to a number of road closures in the area.
Waterloo Street is closed as far down the hill as High Street.
Chamberlain Street is partially closed also.
Police Derry City and Strabane say: “We understand the disruption that this will cause and ask the local community for their patience as we deal with this incident.”
SDLP Foyle MLA Mark H Durkan posted Facebook: “This awful incident is being treated as suspicious.
“Our thoughts and prayers are with a family waking to the worst possible news this morning.
“Please, please come forward if you have any information at all that might help the police with their investigation.”
Sinn Féin councillor Sandra Duffy said the community was in “total shock”.
“My immediate thoughts and prayers are with this woman’s family and friends,” she said.
Tags: