Eighteen-year-old thoroughbred mare Della bolted as the huge balloon's burners ignited overhead and she fell to the ground.
A vet was called but could do nothing to save Della, who had to be humanely destroyed.
Her distraught owner Liz Jones, a 52-year-old accountant with the town council in Henley-on-Thames, Oxon, said seven other horses in nearby fields also stampeded in terror when the red Virgin balloon passed low overhead after aborting a touchdown at Henley Rugby Club.
She said "The recommended minimum height is 500ft around livestock but this was hovering at about two or three times the height of the town hall when it came over the field. It had been even lower than that beforehand."
Mrs Jones had been in the field with Della at Friar Park Stables in Gravel Hill, Henley, when the balloon appeared.
To gain height, the pilot fired up the burners, but the sudden roar caused Della to bolt.
The mare was already unwell and she collapsed to the ground.
She was unable to get up and a vet from Aylesbury was called and eventually administered a lethal injection.
Mrs Jones, of St Mark's Road, Henley, criticised the balloon pilot, saying he shouldn't have used the burners when that low over livestock.
She said there was a 'massive roar' as the flames came out of the gas canisters to make the balloon rise.
"Horses are flight animals - such a sight and sound will immediately put them into a panic. It is pure instinct."
She said she had once taken a trip herself in a hot-air balloon that launched from Henley Rugby Club and travelled over Remenham and Crazies Hill, but her pilot had been sympathetic to livestock.
"There are a lot of studs around there but the pilot was very mindful of where the livestock was.
"He didn't put on the burners as we went over the horses so they weren't disturbed at all. That's what these pilots should be doing."
Mum-of-two Mrs Jones, whose husband Howard, 53, is an IT consultant, had owned the 15.3-hand bay mare for eight years.
Della had been unwell for five days due to a complication of the central nervous system, which made her weak and unstable on her feet.
She was put out in the field on the advice of a vet and Mrs Jones hoped she would recover after a quiet night.
"Her chances were 50-50 if she had got through the night but I was deprived of the hope that she might survive."
She said her horse had been a massive part of her life and her daughter, Kathryn, 23, was 'devastated'.
She added "I've always been into horses and I would go out to see Della twice a day.I rode three or four times a week and Kathryn used to ride her before she went to university.
"You can develop a very strong bond with a horse. She was a really sweet, friendly and special horse to me. It feels like a member of my family has died."
Ruth Lovejoy, who owns the stables, was at home watching TV when she noticed the balloon flying low.
She ran outside, knowing Della would be in danger, but could not save her.
She said "I looked outside because the dogs started barking. The balloon must have been low for me to have seen it through my window.
"It was much lower than it should have been and the burners made a hell of a loud noise.
"The other horses were just going round and round frightened to death.
"Any of them could have panicked and speared themselves on the fence or broken their limbs."
The low-flying balloon was seen as it went over the town and many people took pictures of it on their phones.
One woman who saw it said "I was with a friend and we both stopped to see if the balloon was in any trouble as it seemed too low in the sky.
"The pilot tried to use the burner but it was descending fairly rapidly and wasn't gaining any height.
"It dropped down behind the houses so it was difficult to tell what happened next but other people were stopping and staring and expecting an impact.
"I couldn't say exactly how high it was but it wasn't much higher than the rooftops of the houses along Hart Street."
A spokeswoman for Virgin Balloon Flights said "The balloon was legally permitted to be below 1,000ft as it was on approach to landing.
"We are very sorry to hear about this sad event. Unfortunately, this area was not marked as a sensitive area on the ballooning maps and is used as a regular launching and landing spot for balloons, with no previous incident.
"This area will now be marked as a sensitive area so balloonists are aware of it.
In another drama 30 miles away, onlookers hauled a Virgin hot-air balloon and its passengers to safety after it nearly landed on a busy main road in Newbury, Berkshire.
Rush hour motorists gaped as the huge balloon narrowly missed trees and came down in Victoria Park just yards from the A339.
The Virgin balloon was seen in the skies for around an hour before eventually landing in the park.
People heard the pilot shouting and three residents rushed to pull the balloon away from the road and some trees by grabbing ropes dangling from the passenger basket.
As the balloon landed safely, they were given a round of applause from the worried passengers.
It is believed that the balloon had taken off on a sight-seeing flight from the park but was forced to abandon its journey to Kingsclere eight miles away as there was no breeze.