Henrik, the 83-year-old French-born husband of Queen Margrethe, was hospitalised in Copenhagen in late January for a pulmonary infection and a benign tumour in his left lung.
"His Royal Highness Prince Henrik's condition has unfortunately seriously deteriorated," the palace said in a statement, adding that the crown prince, 49, "is now on his way back to Denmark."
Newspaper BT reported on Friday morning that Crown Prince Frederik's wife, Australian-born Crown Princess Mary, arrived at Rigshospitalet in Copenhagen shortly before 11am, before leaving the hospital around half an hour later with the couple's children, Prince Christian and Princess Isabella.
Last week, the palace said in a statement that, following treatment for a lung infection, "His Royal Highness will stay at Fredensborg Castle."
But the prince's condition has since deteriorated, and he remains admitted at Rigshospitalet. The palace has not released any further information as to his condition.
Prince Henrik was diagnosed in September 2017 with dementia.
The palace did not disclose further details, saying simply that his illness "involves a deterioration of cognitive abilities".
Born Henri Marie Jean Andre de Laborde de Monpezat on June 11th, 1934 near Bordeaux, he married Margrethe, then crown princess, in 1967.
Henrik, who retired from public service in January 2016, has often spoken out about his frustration that his royal title of prince was never changed to king when his wife became queen in 1972.
Last year, he announced that he did not want to be buried next to his wife because he was never made her equal in life, thereby breaking with the tradition of burying royal spouses together in Roskilde Cathedral west of Copenhagen.
The royal couple also have another son, Prince Joachim, who is 48.