Babi, who had been suffering from psychological problems for years, was found dead after the door of her Juhu residence was broken open by a police team following a complaint from an official of her apartment complex.
Police said the door had been locked from inside for three days.
"We received a complaint that she had not collected milk and newspaper from her doorstep for the last two days," said Deputy Commissioner of Police Amitabh Gupta.
Her body was found with an old newspaper clipping of her.
While the cause of death was yet to be ascertained, an overdose of medicines appeared to be one of the possibilities. The body has been sent for post mortem.
The news sent the Mumbai film fraternity into shock.
"She was so young... I am shocked," said actor Jeetendra, a former co-star of the glamorous actress. "She was a very natural artiste. She minded her own work and never got involved in any petty politics."
"I cannot believe it!" exclaimed Randhir Kapur, another former co-star of the actress famed for her long silky tresses and high cheekbones.
Believed to be the first of new-age heroines with a more modern outlook and strong onscreen personality, Babi gained immense popularity in the late 1970s playing the leading lady with shades of grey.
Among her memorable movies were those in which megastar Amitabh Bachchan was the hero such as "Deewar", "Namak Halal", "Shaan", "Amar Akbar Anthony" and "Kala Pathar".
She was also the first Indian woman to appear on the cover of the Time magazine.
Babi, however, suddenly disappeared from films and surfaced many years later with a string of shocking proclamations about her former film colleagues - many taken with a pinch of salt.
In recent years former actress, a sea change from her once-slim self, became a virtual recluse, amid talk of her not being in the best mental condition and receiving psychiatric treatment.
She also took to interior designing and saw only very close friends in the last few years of her life. All that neighbours could see of her was due to her occasional spats with the watchman or others.
According to a reliable source, just a few days back Babi made calls to her former producers for a possible comeback to films. Unfortunately, the response to her overtures was lukewarm since people were wary about her mental stability.
She had time and again accused Amitabh Bachchan of involvement in a conspiracy against her. Two years ago she had called the media to "reveal secrets about celebrities". That is when she again spewed venom at Bachchan.
The actress also made claims against Sanjay Dutt, who was facing trial under an anti-terror law, but the court refused to entertain her statements.