Mr Liu's family had been informed of the situation, medical staff in the north-eastern city of Shenyang said.
The dissident was diagnosed with late-stage liver cancer in May.
He was imprisoned in 2009 on charges of inciting subversion against the state after he helped to write a petition calling for political reform in China.
"Liu Xiaobo's liver function has worsened, his bilirubin levels are gradually rising," the hospital said in a statement.
Bilirubin is produced by the liver, and high levels of it can indicate liver failure.
A photograph showing the dissident looking frail was shared among friends and fellow activists on Thursday. He is standing beside his wife, Liu Xia.
In an open letter to the authorities, his friends have asked to be allowed to visit him on a "humanitarian basis".
"We feel this is deeply tragic and realise that Liu Xiaobo has few days left and fear he is near death," it says.
"At this moment, we urgently need to go to visit him to bring to Liu Xiaobo and Liu Xia their friends' care and well wishes."
On Wednesday, China invited medical experts from the US and Germany to help treat Mr Liu. Authorities said the decision was made at the request of his family.
The decision came ahead of the G20 meeting in Hamburg, Germany.
Diplomatic sources in Beijing say China has been nervous the issue might overshadow President Xi Jinping's appearance at the summit, Reuters reports.
Mr Liu, who was a key leader in the Tiananmen Square protests in 1989, won the Nobel peace prize in 2010.
His wife Liu Xia has been under house arrest since then - but she has never been charged.
Mr Liu has three years left to serve of his sentence for "inciting subversion" after drafting Charter 08 - which called for multi-party democracy and respect for human rights in China.
Amnesty International has said he should never have been jailed.
The Chinese hospital treating imprisoned Nobel Peace laureate Liu Xiaobo for advanced liver cancer says his condition has worsened.