The 56-year-old was diagnosed with lymphoma following tests over the weekend.
He will begin treatment shortly, while continuing his role as senior development coach at Richmond.
Williams was one of Collingwood's biggest names of the 1980s, kicking 178 goals in 135 games after crossing from the Port Adelaide Magpies.
PLAYER PROFILE: Mark 'Choco' Williams.
He won the Copeland Trophy in just his first season and was named captain in 1983, serving for four seasons. He won a second Copeland Trophy in 1985 and took out the Gordon Coventry Trophy as the club's leading goal kicker in 1984.
After finishing his career with the Brisbane Bears, 'Choco' spent time at Essendon as an assistant coach before taking Port Adelaide to its first AFL premiership in 2004.
He then spent two years at Greater Western Sydney as Kevin Sheedy's assistant before joining Richmond at the completion of the 2012 season.
Collingwood wishes Williams and his family all the best as he undergoes treatment.