Deng Zhengjia, in his 50s, died on Wednesday in Chenzhou City, Hunan.
He was hit with a weight from a set of scales after a row erupted with chengguan officials, Xinhua news agency said, citing Mr Deng's niece.
Chengguan are unpopular with the Chinese public after a series of high-profile violent incidents.
The chengguan, or Urban Management Law Enforcement force, support the police in tackling low-level crime in cities.
But the force's ''thuggish'' behaviour had led to public anger and undermined stability, a report by Human Rights Watch said last year.
"They are now synonymous for many Chinese citizens with physical violence, illegal detention and theft," said Sophie Richardson, China director at Human Rights Watch (HRW), when the report was released in May 2012.
The row in Linwu county, Chenzhou, erupted after Mr Deng and his wife "tried to sell home-grown watermelons at a riverside scenic spot, where urban management workers said no vendors were allowed", Xinhua reported.
Police and a disciplinary watchdog were investigating, the report said, without giving more details.
In a statement, the Linwu county government said patrollers found that Mr Deng and his wife Huang Xixi had "set up a watermelon stall in violation of the rules".
An "altercation" arose after the law enforcers asked them to leave, and "the enforcers temporarily confiscated four of the watermelons, requesting that the couple sell their melons in an authorised location instead".
The couple began "insulting" the officers when they encountered them again 50 minutes later, the statement said.
"The enforcers tried to reason with the couple, the dispute between the two sides became a physical conflict, and in the process Deng Zhengjia suddenly collapsed and died," the statement said.
"Both city and county level party committees and governments take the incident seriously, and have ordered the relevant departments to investigate the incident and handle the incident in accordance with the law," the statement added.
Chinese newspaper Guangzhou Daily said: "It is still too early to assert that the chengguan beat the watermelon farmer to death."
"But the watermelon farmer did, after all, die during a dispute with chengguan. Even if his stall location did not meet the chengguan's requirements, there was no reason to resort to force against a 50-year old elderly man."
In July 2011, the death of a disabled street vendor who was reportedly beaten by local law enforcers sparked a riot in Guizhou province.
Some Linwu residents turned out on Wednesday protesting against the chengguan.
The fruit-seller's death has also sparked outrage on China's microblogs, with a search for "Linwu hawker" on Sina Weibo returning over 300,000 results.
Many users expressed anger at the enforcers.
User I Am Tian Dalin wrote: "I'm furious! No one has the right to trample on the lives of others. Who gave the chengguan the right to treat human life as a trifle? Is our taxpayers money supporting public servants, or a pack of wolves?"
User Wen Linhui is a Woman wrote: "No matter what the result of the autopsy is... perhaps the deceased had a pre-existing condition... but it was the chengguan who hit him with scales. First of all, this was already a violation of the law and extremely bad conduct, and furthermore not saving him in time was also a very bad action, the chengguan are a direct cause of the man's death."
She added: "These days a lot of chengguan don't treat farmers and hawkers as humans. In fact, I personally think that hawkers are an eyesore on the city... the issue needs to be resolved, but it needs to take human feelings into account."
Many Sina Weibo users also expressed scepticism at the local government's investigation, suggesting that incident would be blamed on "temporary workers" in the chengguan.
"It always follows this routine: first, the leadership expresses serious concern, and orders an investigation, then after the aftermath is handled and the family are emotionally stable, the investigation will find that it was 'temporary workers' who were responsible," wrote user Night Wind Big Brother.
Police are investigating the death of a fruit seller in China, state media say, amid reports he was beaten by "chengguan" urban security personnel.