The human rights activist had been serving an 11-year jail sentence and was recently moved to a hospital for treatment under heavy guard.
He was 61 years old.
Liu Xiaobo was a prominent figure in the 1989 Tiananmen Square pro-democracy protests in Beijing.
He and other activists negotiated the safe exit of hundreds of demonstrators and have been credited with saving their lives.
He was subsequently placed in a detention centre and not released until 1991.
When not in prison, the university professor was subject to severe restrictions, while his wife, poet Liu Xia, was placed under house arrest.
In 2009, Liu Xiaobo was jailed for 11 years for trying to overthrow the state after he helped write a petition known as Charter 08, calling for sweeping political reforms.
A year later, he was awarded the Nobel Peace Prize for what was termed his "long and nonviolent struggle for fundamental human rights in China."
But he was not permitted to travel to Norway to accept it.
It was only late last month the Chinese government revealed Liu Xiaobo was suffering from late-stage liver cancer.
Chinese authorities denied him permission to travel abroad for treatment, and, instead, he died as he had lived, under the custody of the one-party state.
In a brief statement, Shenyang doctors said he had suffered multiple organ failure, that efforts to save him had failed.
"His family members accompanied him for the entire time of his passing. His spouse, his older and younger brothers and all of his family members accompanied him. And when Mr Liu Xiaobo died, he was not in any pain at that moment, he was very much at peace, because all of his relatives said their goodbyes beforehand."
Reaction to Liu Xiaobo's death was muted in his homeland due to strict censorship, but there has been an outpouring of sorrow from Western leaders and human-rights groups.
German Chancellor Angela Merkel's spokesman tweeted on her behalf, writing, "I mourn Liu Xiaobo, the courageous fighter for human rights and freedom of expression."
United States secretary of state Rex Tillerson has called on China to release his wife from house arrest and let her leave the country.
Chinese dissident artist Ai Weiwei, who lives in Berlin, says the Chinese government contributed to Mr Liu's death.
"China stopped him to have a chance to have medical care in the West, in the United States and, also, in Germany. I think, by doing that, China showed the world how brutal this kind of society can be. There's no tolerance. There's no space for negotiation."
Amnesty International secretary general Salil Shetty says Liu Xiaobo has left a lasting legacy for the world.
"I think it's outrageous. The Chinese government weaved the fiction that Liu Xiaobo was a criminal who was fairly tried under Chinese law and as if the entire country would collapse if he was able to speak freely. But as far as Amnesty International is concerned, he was a prisoner of conscience who campaigned for freedom of expression. Hundreds of thousands of Amnesty supporters across the world have campaigned for his release."
United Nations secretary-general Antonio Guterres has expressed his condolences, as spokesman Stephane Dujarric told reporters.
"The Secretary-General was deeply saddened to learn that Mr Liu Xiaobo, the Nobel Prize laureate, had passed away. He extends his condolences to his family and to his friends."
UN human-rights agency spokeswoman Elizabeth Throssell has also hailed the work of Liu Xiaobo, saying he will remain an inspiration.
"The human rights movement in China, and across the world, has lost a principled champion. Liu Xiaobo devoted his life to defending and promoting human rights peacefully and consistently, and he was jailed for standing up for his beliefs."
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