The veteran of the 1989 Tiananmen Square pro-democracy protests died aged 61, more than a month after he was transferred from prison to a heavily-guarded hospital to be treated for late-stage liver cancer.
Liu's death puts China in dubious company as he became the first Nobel Peace Prize laureate to die in custody since German pacifist Carl von Ossietzky, who passed away in a hospital while held by the Nazis in 1938.
International tributes poured in as Germany, which had offered to treat him, called him a "hero" of democracy. Human rights groups accused President Xi Jinping's government of "cruelty".
"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," the Nobel Committee said in a statement.
"The Chinese government bears a heavy responsibility for his premature death."
The legal bureau in the northeastern city of Shenyang said on its website that Liu succumbed to multiple organ failure, three days after being taken into intensive care at the First Hospital of China Medical University. The official Xinhua news agency, which had not mentioned his hospitalisation, reported his death in English.
Shortly after the announcement, the street in front of the hospital was nearly empty, with a dozen plainclothes men standing guard just outside a gate.
The writer's death silences a government critic who had been a thorn in the side of the authorities for decades and became a symbol of Beijing's growing crackdown on dissenting voices.
Liu was detained in 2008 after calling for democratic reforms and he was sentenced to 11 years in prison for "subversion" a year later.
At the Nobel Peace Prize ceremony in Oslo in 2010 he was represented by an empty chair.
"I mourn Liu Xiaobo, the courageous fighter for human rights and freedom of expression," German Chancellor Angel Merkel's spokesman tweeted on her behalf.
US Secretary of State Rex Tillerson called on China to free Liu's widow, the poet Liu Xia, who has been under house arrest since 2010 but was allowed to be with him at the hospital.
"Mr Liu dedicated his life to the betterment of his country and humankind, and to the pursuit of justice and liberty," Tillerson said in a statement.
'Giant of human rights'
International human rights groups, Western governments and local activists had urged authorities to free Liu and grant his final wish to be treated abroad.
In response to calls to allow Liu to leave China, the foreign ministry repeatedly said other countries should not interfere in China's internal affairs, using the same line on Thursday before his death was announced.
"The Chinese government's arrogance, cruelty, and callousness are shocking – but Liu's struggle for a rights-respecting, democratic China will live on," said Human Rights Watch's China director Sophie Richardson.
Germany had offered to host Liu as recently as Wednesday, calling for a "signal of humanity" from China. The United States and Taiwan were also willing to take him in.
"Tonight we, together with all those concerned with human rights in China, are feeling deep sorrow over Mr Liu Xiaobo's death," Taiwan President Tsai Ing-wen said.
Liu's Chinese doctors had said he was not healthy enough to be sent abroad for treatment, a position that was contradicted by US and German medical experts invited by the hospital to examine Liu's condition last weekend.
Rights groups accused authorities of manipulating information about his health and refusing to let him leave because they were afraid he would use the freedom to denounce China's one-party Communist regime.
Amnesty International secretary general Salil Shetty called Liu "a giant of human rights."
'I'm sorry, Xiaobo'
Liu was arrested nine years ago after co-writing Charter 08, a bold petition that called for the protection of basic human rights and reform of China's political system.
During the Tiananmen Square protests in Beijing, he helped negotiate the safe exit of thousands of student demonstrators on the night of June 3-4, 1989 when the military bloodily suppressed six week-long protests.
Fellow activists and family friends were in mourning.
"I'm sorry, Xiaobo. I'm sorry. We put forth our greatest effort, but we could not win your freedom while you were still living," Beijing-based activist Hu Jia said on Twitter.
"But we will continue fighting for freedom for your love Liu Xia. The world is sorrowful. Your unfulfilled wish is our mission."
