China bears a "heavy responsibility" for the death of Liu, the Nobel Committee said, less than two months after the 61-year-old was transferred to hospital from prison.
International human rights groups, Western governments and Chinese activists had urged authorities to free Liu and grant his final wish to be treated abroad.
German Chancellor Angel Merkel hailed Liu as a "courageous fighter for human rights", while British Foreign Secretary Boris Johnson said it was "wrong" China did not allow Liu to travel overseas for treatment.
US Secretary of State Rex Tillerson called on China to free Liu's widow, who has been under house arrest since 2010 but was allowed to be at the hospital as he said his final goodbye.
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 in 1938, who had been held by the Nazis.
The Nobel Committee said in a statement: "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."
It added: "The Chinese government bears a heavy responsibility for his premature death.
However, even as Germany called him a "hero" of democracy and voiced "regret" that China brushed off its offer to host Liu, US President Donald Trump and his French counterpart Emmanuel Macron offered praise for China's Xi Jinping at a press conference Thursday in Paris, avoiding comment over Liu's death.
UN Secretary-General Antonio Guterres said he was "deeply saddened" but refrained from criticising China for refusing to allow the Nobel laureate to receive treatment abroad.
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.
His family was by his side and he said goodbye to his wife, the poet Liu Xia, and in his final moments told her to "live well", his main doctor said at a news conference.
The bespectacled writer's death silences a government critic who had been a thorn in the side of the authorities for decades and who 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.
He was represented by an empty chair at the Nobel Peace Prize ceremony in Oslo in 2010.
- '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.
"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 Beijing. 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's President Tsai Ing-wen said.
Liu's Chinese doctors had said he was not healthy enough to be sent abroad for treatment, a position contradicted by US and German medical experts invited by the hospital to examine Liu's condition last weekend.
But Liu Yunpeng, the hospital's head of internal medicine, said Thursday that the writer's condition abruptly deteriorated after the foreign doctors requested an assessment to determine if he could travel.
"The danger (of travelling) was extremely great," doctor Liu said.
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.
- '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 weeks of 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."
(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)