The driver, identified as as 58-year-old Neal Parker of Millville, N.J., crashed at Raceway Park in Old Bridge, N.J., Sgt. Stephen Jones said.
Spectator David Farrah of Manalapan said it appeared the driver couldn't stop.
"It looked like the chute just didn't open and he couldn't stop," Farrah said. "The car was just crushed. It was tragic."
Another spectator, George Tompkins, 63, of Metuche, said he left the stands shortly before the crash. He didn't see the wreck, but said he heard it.
"You heard that sound and knew right away that it was bad," he said.
Racing was suspended for more than three hours while the crash was being investigated. NHRA officials said they planned to resume qualifying races at about 4 p.m.
Friday's accident comes nearly two years after top racer Scott Kalitta died when his Funny Car burst into flames and crashed at the end of the track in central New Jersey.
Kalitta's Toyota Solara was traveling at about 300 mph when it burst into flames.
New Jersey State Police investigators determined that "catastrophic mechanical failure" caused the fuel-fired explosion.
The 1994 and 1995 Top Fuel season champion had 18 career victories.
In May, drag racer Jim Head was speeding down a Topeka, Kansas track when his.
Head kept the flaming funny car off the wall and somehow emerged from the inferno with only some scratches and bruises.
In February, a spectator died after being hit by a tire from a crashing dragster at the NHRA Arizona Nationals. The woman was watching a first-round Top Fuel run when Antron Brown's Matco Tools/U.S. Army dragster went out of control on the strip and its left rear wheel came off.