In The Crucible, John Proctor speaks the line in response to a question from Judge Danforth. Already convinced that Proctor is in league with the devil, Danforth is demanding that he confess.
Danforth . . . To Proctor: Will you confess yourself befouled with Hell, or do you keep that black allegiance yet? What say you?
Proctor, his mind wild, breathless: I say—I say—God is dead!
Proctor is on the verge of a mental breakdown. He can no longer believe in God and inverts this belief by saying that God has died, along with the falsely convicted women who have been killed. Holding the people of Massachusetts responsible, both those of Salem and the visitors such as Danforth, he accuses them and himself of cowardice (“them that quail to bring men out of ignorance”) and hypocrisy (“this be fraud”). Lucifer, he claims, has taken hold of all of them; he hears his “boot” and sees “his filthy face.” He then revises the statement and says that God has damned them. Crying out that “a fire is burning,” he continues that because of their sins, “We will burn together!”
Proctor says this horrifying line after he has seen the awful power that Abigail, "a whore" (to use his word), has over Danforth and the court, after his wife, Elizabeth, has lied to save his name (making it appear that he was lying when he explained Abigail's ulterior motives for accusing Elizabeth), and after Mary Warren, his servant who he brought to the court to confess that the girls were actually "sportin'" when they made accusations, has turned on him and told the court that Proctor is "the Devil's man."
When Proctor says that "God is dead," he means that God is no longer the ruling force in Salem anymore. The Devil is now in charge, and he is working through these lying girls and this corrupt court to take innocent victims. Further, Proctor says,
A fire, a fire is burning! I hear the boot of Lucifer, I see his filthy face! And it is my face, and yours, Danforth! For them that quail now when you know in all your black hearts that this be fraud-- God damns our kind especially, and we will burn, we will burn together!
Not only is the Devil, then, working through the girls and Danforth, but also through men like Proctor (and even, perhaps, Hale), men who knew (or suspected) early on that it was not witchcraft but spite and greed at the root of these accusations, and said nothing. They have all welcomed the Devil in, and he lives now in Salem, not God.