Liu, 61, was jailed for 11 years in 2009 for "inciting subversion of state power" after he helped write a petition known as "Charter 08" calling for sweeping political reforms.
Mourning his death, German Chancellor Angela Merkel called Liu a "courageous fighter for civil rights and freedom of expression", while the French and US governments called on China to allow Liu's family to move around freely.
Already seriously ill, Liu, a thorn in the ruling Communist Party's side since he helped negotiate a deal to allow protesters to leave Tiananmen Square before troops and tanks rolled in, was moved last month from prison to a hospital in the northeastern city of Shenyang to be treated.
The Shenyang Bureau of Justice said in a brief statement on its website that Liu had suffered multiple organ failure and efforts to save him had failed.
Despite being given multiple forms of treatment his illness had continued to worsen, it added.
The hospital treating him confirmed in a separate statement the cause of death.
The leader of the Norwegian Nobel Committee which, to Beijing's ire, awarded Liu the peace prize in 2010, said the Chinese government bore a heavy responsibility for his death.
"We find it deeply disturbing that Liu Xiaobo was not transferred to a facility where he could receive adequate medical treatment before he became terminally ill," said Berit Reiss-Andersen in an emailed statement.
China said at the time that Liu's award was an "obscenity" that should not have gone to a man it called a criminal and a subversive.
Carl von Ossietzky, a pacifist who died in 1938 in Nazi Germany's Berlin, was the last Nobel Peace Prize winner to live out his dying days under state surveillance.
Reform call
Western government and rights groups expressed sorrow at Liu's death, and criticised Beijing for not allowing him to seek treatment for his cancer overseas.
"China has lost a deeply principled role model who deserved our respect and adulation, not the prison sentences to which he was subjected," said US ambassador to China Terry Branstad in a statement that also called on Beijing to release all prisoners of conscience.
Tsai Ing-wen, the president of self-ruled Taiwan which China regards as a renegade province, said on her Facebook page the island hoped China could now show self-confidence and promote political reform following Liu's death.
In China, while mention of Liu's passing was swiftly removed from Weibo, the country's answer to Twitter, images and comments were shared on the WeChat messaging service.
Some activists shared a picture of a black screen with the years 1995-2017 - his lifespan - or of a single candle superimposed over his face.
"Mr. Liu, rest in peace," wrote rights lawyer Zhang Peihong on his WeChat account.
Freedom of movement
UN High Commissioner for Human Rights Zeid Ra'ad Al Hussein urged China to guarantee his wife Liu Xia freedom of movement, and allow her to travel abroad should she want to. Liu Xia has lived under house arrest since 2010.
"Despite the imprisonment and separation from the wife he adored that could have fuelled anger and bitterness, Liu Xiaobo declared that he had no hatred for those who pursued and prosecuted him," Zeid said.
Rights groups and Western governments had urged China to allow Liu and his wife to leave the country to be treated abroad, as Liu had said he wanted.
But the government had warned repeatedly against interference and said Liu was being treated by renowned Chinese cancer experts. The hospital had said he was too sick to travel.
Beijing did allow two foreign doctors, from the United States and Germany, to visit Liu on Saturday and they later said they considered it was safe for him to be moved overseas.
The doctors said Liu and his family had requested that the remainder of his care be provided in Germany or the United States.
Family friend and fellow dissident Hu Jia said the ruling Communist Party would not let him die in peace.
"To some extent, this was an attempt by the party to show their strength, to show that they control your life if you live in China," he told Reuters.
"But I think the historic message they are leaving is very different. By letting a Nobel peace prize winner die in custody they lost a chance to show humanity and instead proved their cold-blooded nature."
In the Chinese territory of Hong Kong, which enjoys broad freedoms not granted in mainland China, around 100 protesters gathered in silence within an hour of the news of his death being announced outside of the Beijing representative office in silence, some quietly sobbing and others with their heads.
Many held signs reading "The people's hero, he'll always be remembered," "the murder of a dissident" and "free Liu Xia".
"What happened to Liu Xiaobo tells the whole world about the human rights situation in China," said pro-democracy lawmaker Leung Kwok-hung.
