The race was stopped after four minutes when Simoncelli's bike veered across the track at turn 11 into the path of Colin Edwards and Valentino Rossi.
The 24-year-old had his helmet knocked off and was hit by both other riders.
American rider Edwards also fell but escaped serious injury - while fellow Italian Rossi was able to return to the pits.
Simoncelli lay motionless on the track after the impact, while the race was immediately red-flagged.
At first officials were looking to restart the race before the extent of Simoncelli's injuries became clear.
Honda rider Simoncelli first entered MotoGP for the 2010 season and won his first pole position at the Catalunya race in June this year.
SIMONCELLI FACTFILE
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Born: 20 January 1987, Cattolica, Italy
125 Championship: 2002-05, 2 wins
250 Championship: 2006-09, 12 wins
MotoGP: 2010-11
Simoncelli's first podium finish came in the Czech Republic in August when he finished third but he bettered that with a second-place finish at the Australian GP.
World champion Casey Stoner said: "As soon as I saw the footage it just makes you sick inside. Whenever the helmet comes off that's not a good sign."
British MotoGP rider Cal Crutchlow Tweeted: "RIP Marco Simoncelli! A great rider and all round nice guy. My thoughts are with all his family & friends. I will never forget today."
Australian Formula One driver Mark Webber Tweeted: "RIP Marco. A special talent that will be missed. Thinking of your loved ones and all the MotoGP paddock."
The Italian, a former European 125cc champion, was a race-winner and front-runner during three years in world championship 125cc racing before moving to the 250cc series in 2006.
He spent four seasons with the Gilera team, with the breakthrough coming in 2008 when he not only became a winner for the first time, but charged to the title, beating Alvaro Bautista.
Simoncelli stayed on in 250cc to defend his title in 2009, although he narrowly lost the crown to future Gresini MotoGP team-mate Hiroshi Aoyama after an early-season injury left him playing catch-up.
He secured a MotoGP seat with Gresini for 2010 and earned a factory specification Honda for 2011.
Pole positions at Catalunya and Assen came amid a run of six straight front row starts.
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