Asghar Khan, 96, was born in Jammu and Kashmir in 1921.
He was undergoing treatment for a chest infection at the Combined Military Hospital in Rawalpindi.
Air Marshal Khan became the youngest head of Pakistan Air Force (PAF) at the age of 35. His funeral prayers will be offered tomorrow in Abbottabad, Dawn news reported.
Pakistan President Mamnoon Hussain and Prime Minister Shahid Khaqan Abbasi have expressed condolence over his death.
Pakistan Army chief Gen Qamar Javed Bajwa paid tribute to the late fighter pilot in a message posted on Twitter by military spokesman Maj Gen Asif Ghafoor.
Qamar Javed Bajwa called Air Marshal Khan an "iconic" soldier who will be remembered for his historic contributions for laying foundations of a strong Pakistan Air Force.
PAF chief Air Marshal Sohail Khan said Air Marshal Khan headed the PAF diligently and with courage. With his leadership capabilities, he played a vital role in transforming the PAF into a modern air force.
Asghar Khan was made the group captain in 1949, and in the same capacity, he undertook the charge of air operations of PAF.
Before him, British officers held top military posts in newly independent Pakistan.
In the era of Field Marshal Ayub Khan, the former head of the PAF spearheaded a movement with the intent to have Zulfikar Ali Bhutto released from jail.
He also served as the president of state-run Pakistan International Airlines.
In 1970, Khan founded Tehreek-i-Istaqlal, a secular political party but could not dent the vote bank of other major parties of the time, such as the Pakistan Peoples Party.
In 2012, the party was merged with the Pakistan Tehreek-iInsaf (PTI) led by cricketer-turned-politician Imran Khan.