Liu, who has about three years of his 11-year sentence to serve, was diagnosed on May 23 and was released days later, his lawyer Mo Shaoping told AFP.
The 61-year-old democracy campaigner was being treated at a hospital in the northeastern city of Shenyang.
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The writer was sentenced in 2009 for "subversion" after spearheading a bold petition for democratic reforms. He was awarded the Nobel Prize a year later and was represented by an empty chair at the ceremony in Oslo.
Supporters voiced concerns about his health and criticised the way he has been treated by Chinese authorities.
"Adding injury to insult, Liu Xiaobo has been diagnosed with a grave illness in prison, where he should never have been put in the first place," Patrick Poon, China researcher at global rights group Amnesty International, told AFP.
Poon called on Chinese authorities to ensure Liu "receives adequate medical care, effective access to his family and that he and all others imprisoned solely for exercising their human rights are immediately and unconditionally released".
Su Yutong, a Chinese journalist and activist in exile in Germany since 2010, said she was "very shocked and saddened" that her friend had fallen ill in prison, and urged authorities to let him travel overseas for treatment.
"We still do not know whether in prison he was subjected to severe torture and inhumane treatment," Su said.
"But for a scholar, when he was imprisoned in prison, he could not write, could not speak, could not gain the freedom of thought, which must have been the greatest torture," she said.
Liu is one of only three people to have won the Nobel award while jailed by their own government.
China strongly condemned his Nobel prize as unwanted foreign interference in its internal affairs and refused to allow him to attend the ceremony in Oslo.
Diplomatic ties and trade talks between Beijing and Oslo were frozen after Liu was given the award, and Norway's salmon industry suffered as exports to China were halted.
Relations were only normalised in December 2016.
Asked about Liu's parole, foreign ministry spokesman Geng Shuang told a regular news briefing: "I am not aware of the situation you're talking about."
The international community has been calling for his release for years.
Liu was arrested in 2008 after co-writing Charter 08, a bold petition that called for the protection of basic human rights and the reform of China's one-party Communist system.
Charter 08, which was posted online, specifically demands the abolition of subversion as an offence in China's criminal code — the very crime for which Liu has been jailed.
His wife, Liu Xia, has been under house arrest since 2010. She suffered a heart attack in 2014, when she was diagnosed with depression after years of detention, a rights group said at the time.
She could not be reached for comment on Monday and an automated message said her phone was no longer in service.
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