Simon turned his right ankle on the first point of the second game of the second set after Gasquet won the first set in 51 minutes, handing the match to his countryman 7-6 (7/4), 1-0.
He was preparing to hit a return when he started hopping in pain and then fell to the court. He got to the sidelines but found that the eight-man exhibition event did not have the standard ice and a physio available on court.
The Frenchmen used a cold drinks bottle to try and slow the swelling before officials arrived.
After several minutes Simon withdrew and was helped off court, limping.
Gasquet will on Saturday play for the title against Tomas Berdych after the Czech clinched his spot on Wednesday with a defeat of Japan's Kei Nishikori.
With the first Grand Slam of the season starting on Monday, Simon, seeded 18 at the Australian Open, faces a race for fitness prior to his first round match against Germany's Daniel Brands.
Gilles Simon hurts ankle to send Richard Gasquet into Kooyong final
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