The Gresini Honda rider lost control of his bike on the second lap of the circuit in Sepang and appeared to be hit by Colin Edwards and then Valentino Rossi as he slid across the track.
The 24-year-old's helmet came off in the collision and he was taken to the medical centre for treatment, but died from his injuries.
Simoncelli's death comes exactly a week after British racing driver Dan Wheldon, a former IndyCar champion and two-time Indy 500 race winner, was killed in a 15-car pile-up at the Las Vegas Motor Speedway. The Buckinghamshire driver was 33.
The organisers cancelled Sunday's race as soon as the extent of Simoncelli's injuries became apparent.
A statement on the MotoGP official website read: "On Sunday 23rd October, during the MotoGP race at the Shell Advance Malaysian Motorcycle Grand Prix at the Sepang International Circuit, San Carlo Honda Gresini's Italian rider Marco Simoncelli suffered a serious accident in which he received critical injuries.
"The race was stopped immediately with the red flag and Simoncelli was transported by ambulance to the circuit medical centre where the medical staff worked to resuscitate him.
"Despite their efforts, Marco sadly succumbed to his injuries at 4:56pm local time.
"Everybody involved in MotoGP extends its deepest condolences to Marco's family, friends and team at this tragic loss."
Simoncelli, who won the 250cc world championship in 2008, clinching the crown in Sepang, stepped up to MotoGP in 2010.
His death was the first fatality in MotoGP since Japan's Daijiro Katoh died from his injuries sustained at the 2003 Japanese Grand Prix.
Newly-crowned champion Casey Stoner admitted immediately after the crash he had feared for Simoncelli.
"As soon as I saw the footage it just makes you sick inside," the Australian told BBC2.
"Whenever the helmet comes off that's not a good sign."
Tributes poured in for Simoncelli from teams and riders.
British MotoGP rider Cal Crutchlow wrote on Twitter: "RIP Marco Simoncelli ! A great rider and all round nice guy. My thoughts are with all his family & friends. I will never forget today [Sunday]."
Formula One driver Mark Webber tweeted: "R.I.P Marco A special talent that will be missed... Thinking of your loved ones, and all the motogp paddock..mark."
A message on Simoncelli's Gresini Honda team website read simply "CIAO 'SUPER SIC'.
The Rizla Suzuki team wrote: "All at Rizla Suzuki are deeply affected by today's [Sunday's] tragic events and send their deepest condolences to Marco's family and friends during this time of great loss.
"R.I.P Marco Simoncelli, 20 January 1987 - 23 October 2011 - A true competitor."
Marco Simoncelli Factfile
1987: Born in Cattolica, Italy on January 20.
1996: Runner-up in the Italian Minimoto Championship.
1999: Champion of the Italian Minimoto Championship.
2000: Claims a back-to-back title in the Italian Minimoto Championship and is runner-up in the European Minimoto Championship.
2001: Moves up to the the Italian 125cc Championship and wins the title in his rookie year.
2002: Wins the European 125cc title.
2003: Takes part in his first full season in the 125cc World Championship with the Matteoni Racing team.
2004: Joins the Rauch Bravo team and wins his first Grand Prix at a rain-soaked Jerez.
2005: Completes another 125cc campaign with the Nocable.it Race team and finishes fifth in the final standings.
2006: Moves up to the 250cc class riding for Gilera. Finishes the season in 10th overall with a sixth place finish at the Chinese Grand Prix his best result.
2008: June - Wins his first 250cc race at the Italian GP in Mugello in controversial circumstances when Hector Barbera crashed into him after Simoncelli appeared to try to block him off.
October - Wins the 250cc World Championship after a successful season with Gilera with a third place finish in the Malaysian Grand Prix at Sepang.
2009: Finishes third overall in the 250cc World Championship behind Japan's Hiroshi Aoyama and Spain's Barbera.
2010: Moves up to ride in his debut MotoGP season for Honda. Finishes 16 of the 18 races en route to eighth place in the championship.
2011: May - Collides with Dani Pedrosa while battling for second in the French GP. The resulting crash saw Pedrosa break his collarbone and Simoncelli receive a ride-through penalty, eventually finishing fifth. Simoncelli accepted he needed to re-evaluate his driving style and at times be more cautious.
June - Claims his first MotoGP pole at the Catalan GP but a poor start resulted in a sixth placed finish.
October 23 - Killed in a crash during the Malaysian GP in Sepang.