Mr Chipp, who had a long battle with Parkinson's Disease, died last night at Epworth Hospital.

The hospital said today he had died surrounded by close family.

"The family have requested that their privacy be respected at this sad time," the statement said.

Democrats leader Lyn Allison said Mr Chipp had looked well when he addressed the party's national conference in May.

She said he was always driven by a sense of justice and human rights.

"He was a conviction politician," she said. 

"He was a very liberal man. He certainly wouldn't have fitted the mould of the conservative liberal today - his natural home was with democrats. We'll miss him enormously, he'll be deeply mourned."

Democrats deputy leader Senator Andrew Bartlett said  Mr Chipp left a good legacy.

The former senator, earned a place in the hearts of Australians for coining the campaign slogan "Keep the bastards honest", which became the catchcry of his middle-ground political party.

Mr Chipp announced he was suffering from Parkinson's Disease in March 2004, saying he chose to make the diagnosis public to draw attention to the need for extra resources to help sufferers and fund research.

Mr Chipp was preselected for the Liberal Party for the eastern Melbourne seat of Higinbotham in 1960 and served under prime ministers Robert Menzies, Harold Holt, John Gorton, William McMahon and Malcolm Fraser.

He was appointed minister for the navy in 1966, then served as Minister for Customs and Excise from 1969 to 1972.

He quit the party and founded the Australian Democrats in 1977 "to keep the bastards honest", he said at the time.

Senator Allison said that even though the catchcry was only once used as the party's official slogan, it had stuck.

"He said it and it rang true. He was able to communicate directly with people and people appreciated that larrikin side of Don, he was witty and good-humoured."

Mr Fraser said today that Mr Chipp was a passionate politician and family man.

"His contribution to Australian politics through the establishment of the Australian Democrats will be there for all time," Mr Fraser said in a statement.

Senior Labor MP Julia Gillard said Mr Chipp would remain an inspirational figure for smaller parties and independents.

"There is always going to be a role in Australian politics for smaller parties and independents who say their mission is to keep the bastards honest," she said today.

Prime Minister John Howard said Mr Chipp was an admirable man who made a huge impact on Australia.

"Don Chipp was a very colourful figure in Australian politics," Mr Howard said. "To me, the most endearing thing about Don Chipp was, to the very end, he was passionate and committed to the causes in which he believed.

"He was a believer and whether you agreed with his beliefs or not is not really the point, he held them very passionately, he put them very strongly.

"Don Chipp has made a huge impact on Australian public life over a very long career and I know he will be greatly missed, especially by members of the Australian Democrats."

Mr Howard said it would be for historians to judge whether Mr Chipp's decision to leave the Liberal Party was right or wrong.

"I was sorry he left because I was a junior minister in a relatively new government but he made his decision and he explained the reasons why he left at the time."

Mr Howard said Mr Chipp would be given a state funeral.