Koirala, who was elected Prime Minister of Nepal on February 10, 2014, died at his residence in Maharajgunj in the outskirt of capital Kathmandu at 12.50 a.m (local time), Nepali Congress general secretary Prakash Man Singh said.
He had returned from the US after undergoing a successful treatment for the lung cancer and is credited with promulgating the new constitution of Nepal in September last year.
Koirala was suffering from Chronic Obstructive Pulmonary Disease (COPD) and he succumbed to the disease.
His body will be taken to party's central office at sanepa, Kathmandu and kept there for last tributes from party cadres and others, Singh said.
Born in Banaras, India, Koirala entered politics in 1954 and was in political exile in India for 16 years following the royal takeover of 1960.
He also spent three years in Indian prisons for his involvement in a plane hijacking in 1973.
Indian Prime Minister Narendra Modi condoled the death of Koirala, saying "India lost a valued friend".
"Sushil Koirala ji's simplicity holds lessons for all of us. My condolences to the Koirala family and people of Nepal in this hour of grief," Modi said in a tweet.
"In Sushil Koirala ji, (Nepali Congress) NC has lost a big leader who served Nepal for decades and India lost a valued friend. Pained by his demise. RIP," the prime minister added.
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