Colin McRae and his five-year-old son Johnny
Profile of a sporting legend
Mr McRae, 39, his son Johnny, friend Ben Porcelli, 6, and Graeme Duncan, 37, died following a helicopter crash in Lanarkshire on Saturday.
Jimmy McRae said it was "unbelievable" that his son and grandson's lives had been taken "so prematurely".
He issued his statement a few hours before police began removing the bodies of the four from the crash site.
Mr McRae snr said that his grandson's friend Ben was a "great buddy" and that Mr Duncan was a close friend of Mr McRae since school.
Speaking on behalf of the family, he added: "It is with much sadness and regret that we have to make this statement.
"It is unbelievable that Colin and Johnny's lives have been taken so prematurely and in such a tragic manner.
Johnny was a great wee guy, spending every spare minute with his dad, and even at this early stage it looked like he had the potential to carry on the family dynasty
Jimmy McRae
"Colin was a great son, a loving husband to Alison and a fantastic father to Johnny and his big sister Hollie.
"Johnny was a great wee guy, spending every spare minute with his dad, and even at this early stage it looked like he had the potential to carry on the family dynasty."
He said the family's thoughts were "very much" with the families of Ben and Mr Duncan.
"Ben was a great buddy of Johnny's and they had always spent a lot of time together both in and out of school," he added.
'Role model'
He said Mr Duncan, who lived in France, was back in Lanark on holiday.
"We are thankful for the overwhelming number of messages of support we have received from all around the world," Mr McRae Snr said.
"Colin was very much an inspiration and role model to motor sport fans the world over."
Ben Porcelli and Graeme Duncan also died in the crash
In a statement, Ben's father Mark and mother Karen, said: "We are absolutely devastated with the loss of our son Ben following this terrible accident.
"He was a charming, fun-loving and caring wee boy - the best boy in the world who enjoyed great times with his wee pal Johnny. It is just so tragic that their lives have been cut so short.
"Our thoughts also go out to the McRae and Duncan families."
Formal identification is expected in the next few days.
Ch Supt Tim Love from Strathclyde Police said the crash was not survivable and it was very difficult to tell the aircraft had been a helicopter.
Air accident investigators have started searching the helicopter crash site near Mr McRae's home.
The Scottish Subaru Impreza Owners' Club have been leaving tributes at the entrance to the house.
We had some great times and his passing is a terrible blow for the McRae family and everyone who came in contact with him
David Coulthard
Formula One driver
Motorsport pays tribute
About 40 firefighters attended the accident which happened in woods just north of Lanark at 1600 BST.
Users of the rally champion's official website www.colinmcrae.com were greeted by a black screen on Sunday with no information available.
Mr McRae was Britain's first rally world champion in 1995 and is the son of five times British rallying champion Jimmy McRae.
He admitted to enjoying the adrenaline rush of activities such as bungee jumping and was a keen pilot.
Wider fame
Nicky Grist, his co-driver since 1997, said: "Colin was always regarded as being a bit of a risk-taker in cars, but when it came to flying a helicopter he was a totally different man.
"The one thing he always told me, he said 'You don't mess about with a helicopter. They are bigger and better than I am and you have to drive them as such'."
Mr McRae had moved to Monaco in 1995 but as his family grew up he spent more time back at his home in Lanarkshire. He and his wife Alison bought the 17th Century Jerviswood House.
Fans have been laying tributes near Mr McRae's house
Rev Bryan Kerr, minister of Lanark Greyfriars Church and a neighbour of the McRae family, said: "A lot of people have been stunned by this and our thoughts go out to all of the families affected.
"This will be hugely devastating, particularly in such a small community. You just don't expect these things to happen on your doorstep especially when it is someone who is so well known and well liked in the town.
"The town's ministers have spoken to each other and special prayers will be offered for all those affected by the tragedy and remembering those who are working on the rescue efforts and trying to piece together what happened."
First Minister Alex Salmond said: "Colin McRae was an outstanding Scottish sportsman of international stature and achievement.
"His death is a great tragedy, and my thoughts and condolences are with all the families and friends bereaved by this terrible accident."
Video games
Mr McRae's brother Alister also enjoyed success as a driver, winning the British Rally Championship in 1995.
HAVE YOUR SAY Single-handedly carried the sport of rallying to the mainstream. God bless you
Aaron Wood, London
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Circuit success led to further fame through Mr McRae's endorsement of a series of rally video games.
'Colin McRae: DiRT' was the title for the latest instalment of the games series which launched this year on PC, Xbox 360 and PlayStation 3.
Stars from the world of motor sport have been paying tribute to Mr McRae.
Friend and Formula One ace David Coulthard, said: "He and Alison were good friends and I cannot imagine either without the other.
"He was fearless, flamboyant, blindingly quick in the car.
"We had some great times and his passing is a terrible blow for the McRae family and everyone who came in contact with him."
Colin McRae am 23. Juni 2007

 Rallye-Meister Colin McRae ist am 15. September bei einem Absturz mit seinem Hubschrauber tödlich verunglückt. Im Hubschrauber waren auch sein fünfjähriger Sohn, ein 37-jähriger Schulfreund McRaes namens Graeme Duncan und eine weitere Person, die ebenfalls bei dem Absturz ums Leben kamen. Die Absturzursache ist noch ungeklärt.

Jim McRae, Colin McRaes Vater und selbst fünfmaliger Rallye-Meister, zeigte sich bestürzt über das Unglück. Rennsportler weltweit trauern um die Rallye-Legende. So bekundete auch David Coulthard seine Trauer. Er merkte an, dass der Unfall ein schwerer Schlag für McRaes Familie und alle von McRaes Bekannten sei. Auch in seiner Stadt war der Schotte sehr beliebt, wie ein Nachbar der BBC mitteilte.

McRae wurde 39 Jahre alt. Er galt als Inbegriff des Rallye-Sports, nachdem er 1995 als erster Brite den Weltmeistertitel errang. Danach schloss der Schotte Verträge mit Sony Entertainment ab, die dazu führten, dass eine Rallye-Spieleserie für den Computer und Spielekonsolen erschien.

Die förmliche Identifikation steht noch aus.