In Season 3 Shax killed Prue by throwing her through the wall after she tried to save Dr.Griffith. Piper and Prue were both thrown back into the wall to save Dr. Griffith but Leo came back to save them and before that. Phoebe was in the underworld with Cole and Leo. Phoebe asked the source to call Tempus to turn back time but it was to late when they got back to save Piper and prue. Leo came back to save Piper and Prue the second time and saved Piper but not Prue because she was already dead.
prue died by a lighting blast thrown through an wall by the sources assistant shax in theseason 3 finale episode all hells breaks loose and her funeral was shown in the 4th season premiere two parter episodes charmed again part 1 and 2
In the last episode on season 3 (all hell breaks loose) Prue and Piper are injured by Shax, a personal assassin for the Source. Leo can only heal one so he naturally chooses Piper, his wife. So in summary she was murdered by Shax. In reality she kept causing fights between the actresses who play Piper and Phoebe so everyone got sick of his and they threw her off.