The 20-year-old man was walking with friends at Wentworth Falls, west of Sydney, on Sunday afternoon when he lost his footing and fell some 80 meters (260 feet).
Police said a friend summoned help and while paramedics were able to establish that he was dead, their helicopter crew was unable to retrieve the body due to high winds.
A guard was placed at the scene overnight and officers walked into the bushland Monday morning to help winch him out.
A witness told state broadcaster ABC she had seen a group of friends gathered on some rocks.
“Then they went down to the next one and I knew something was going to happen,” she said.
“We just saw them all panic and a 20-year-old boy fell over, down the waterfall.”
The Blue Mountains are a popular tourist attraction some 60 kilometers (40 miles) west of Sydney. Consisting mainly of a sandstone plateau, the area is dissected by gorges up to 760 metres deep.