Simoncelli crashed after losing 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 Gresini Honda rider's helmet came off in the collision and he was taken to the medical centre for treatment, but he was declared dead at 1656 local time.
Organisers cancelled the race as soon as the extent of Simoncelli's injuries became apparent.
Simoncelli's death comes a week after British racing driver Dan Wheldon, a two-time Indy 500 race winner, was killed in a 15-car pile-up at the Las Vegas Motor Speedway.
Spanish rider Dani Pedrosa had a dispute with fellow factory Honda rider Simoncelli earlier this season, but news of his rival's death left last season's championship runner-up reeling.
Repsol Honda's Pedrosa said: "In a tragedy like this there is not much to say. I just want to give my condolences to his family and all the people who love him. I've been with his father and all we could do was to hug, nothing else matters.
"It was a fatal accident and everybody in the paddock remains in shock.
"Many times we ourselves forget how dangerous this sport can be and when you lose people on the way nothing has any meaning. It's clear that we all do what we like, what we love, but on days like today nothing matters."
Newly-crowned MotoGP champion Casey Stoner added: "I'm so shocked and saddened by the loss of Marco. When things like this happen it reminds you how precious life is, it makes me feel sick inside.
"All I can say is how sorry I am for Marco's whole family I can't imagine what they are all going through and our thoughts and wishes are with them at this time. I hope they all stay close and pull through this tragedy together."
Simoncelli's compatriot and Repsol Honda rider Andrea Dovizioso said: "I watched the images and I'm shocked: in a race you fight and push hard and disaster is often around the corner.
"Marco was a strong rider and he always pushed hard. We raced together since we were kids, I saw him always pushing to the maximum, he crashed many times, but without major injuries, he was seemed invincible. What happened today seems impossible."
Simoncelli, who won the 250cc world championship in 2008, clinching the crown in Sepang, stepped up to MotoGP in 2010 and he finished eighth overall last season.
His death was the first fatality in MotoGP since Japan's Daijiro Katoh died from his injuries sustained at the 2003 Japanese Grand Prix.
Speaking at a press conference following today's tragedy, medical director Dr Michele Macchiagodena said of Simoncelli: "Because of the crash he had during the race, in which he was hit by other riders, he suffered a very serious trauma to the head, to the neck and the chest.
"When our medical staff got to him he was unconscious. In the ambulance because there was a cardiac arrest they started CPR (cardiac pulmonary resuscitation).
"Immediately in the medical centre, with the help also of the doctor of our staff at the Clinica Mobile and local doctors, he was intubated and it was possible to take off some blood from the thorax.
"The CPR was continued for 45 minutes because we tried to help him for as long as we thought it was possible. Unfortunately it was not possible to help him and at 16:56 (local time) we had to declare he was dead."
Macchiagodena also confirmed that Edwards had suffered a dislocated shoulder in the crash but that it had been reset under anaesthesia and the American was "fine".
When asked about Simoncelli's helmet coming off, race director Paul Butler said at the press conference: "I think if I may reply, that will be for another occasion. Quite clearly the consequences and circumstances surrounding the accident will be thoroughly investigated."
Tributes poured in for Simoncelli from both MotoGP and the wider world of motorsport.
Formula One driver Mark Webber wrote on Twitter: "R.I.P Marco A special talent that will be missed... Thinking of your loved ones, and all the motogp paddock..mark."
Briton's Jenson Button wrote on his Twitter account: "R.I.P Marco... Such an exciting talent lost. My thoughts are with his family, friends and everyone involved in MotoGP. Motorsport can be so cruel..."
British MotoGP rider Cal Crutchlow added 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."