It is believed the 89-year-old woman swerved to avoid a wallaby and the car went off the road, ploughing through trees and undergrowth. She died at the scene.
The accident happened at Ten Mile Creek, six kilometres south of Grafton, at about 11.40am.
The passenger in the car, an 87-year-old Port Macquarie woman, survived the crash and was airlifted to Coffs Harbour Health Campus.
The injured woman was last night listed in a stable condition.
A spokesperson from the Westpac Life Saver Rescue Helicopter Service said it appeared the driver swerved to miss a wallaby.
WIRES representative Dick Richards said reports of wallabies and kangaroos on the roads had increased in the past three weeks.
Mr Richards said they were very active in the middle of winter because they liked the dull light.
He warned people to be careful when driving, particularly in areas of high wildlife activity.