In November 1977 Vicious met American groupie Nancy Spungen and they immediately began a relationship (Spungen had come to London looking for Jerry Nolan of The Heartbreakers). She was a heroin addict, and Vicious, who already believed in his own "live fast, die young" image, soon shared the dependence. Although they were deeply in love, their often violent and rocky relationship had a disastrous effect on the Sex Pistols. Both the group and Vicious visibly deteriorated during their 1978 American tour. The Pistols broke up in San Francisco after their concert at the Winterland Ballroom on January 14, 1978. With Spungen acting as his "manager," Vicious embarked on a solo career during which he performed with musicians including Mick Jones of The Clash, original Sex Pistols bassist Glen Matlock, Rat Scabies of The Damned and the New York Dolls' Arthur Kane, Jerry Nolan, and Johnny Thunders.

Meanwhile, Vicious and Spungen had become locked in their own world of drug addiction and self-destruction. Interview footage shows the couple attempting to answer questions from their bed: Spungen is barely coherent while Vicious lapses in and out of consciousness. He also came very close to death following a heroin overdose and was in hospital for a time. On the morning of October 12, 1978, he allegedly awoke from a drugged stupor to find Spungen crumpled dead on the bathroom floor of their room (room 100) in the Hotel Chelsea in New York. She had received a single stab wound to her abdomen and apparently bled to death. He was arrested and charged with her murder although he said he had no memory of having done so. There are several theories that Spungen was murdered by someone else, usually said to be one of the two drug dealers who visited the apartment that night, and involving a possible robbery as certain items (including a substantial bankroll) were claimed to be missing from the room. In his book, Pretty Vacant: A History Of Punk, Phil Strongman names Nancy's killer as Rockets Redglare.

When he had appeared in court over Spungen's death, he was briefly interviewed by a television journalist (the footage appears in The Filth and the Fury). He was shaking slightly and appeared sober, morose, and withdrawn:

Interviewer: Are you having fun at the moment?

Vicious: Are you kidding? No, I am not having fun at all.

(long pause)

Interviewer: Where would you like to be?

Vicious: Under the ground.

Interviewer: Are you serious?

Vicious: (quietly, and sad) Yeah.

Bail of USD $30,000 was put up by Virgin Records at McLaren's request. The plan was for Vicious to record an album with fellow Pistols Steve Jones and Paul Cook in order to raise funds for his defense. This was to be a collection of standards including (according to McLaren) White Christmas and Mack the Knife. It is also possible, according to Paul Cook, that the album was to be a selection of Sid's favourite songs and would have included tracks from The Stooges, the Ramones, the New York Dolls and The Heartbreakers^{[citation needed]}. On February 2, 1979, a party to celebrate his release was held at the home of his new girlfriend Michelle Robinson. During his time at Rikers Island prison, Vicious had undergone drug rehabilitation therapy and was supposedly clean. However, at the party he obtained some heroin from his mother, and was discovered dead the following morning, having taken a large overdose. Speculation has persisted that Vicious, unable to live without his beloved Nancy, committed suicide. He wrote the following poem about her:

You are my little baby girl,

We share all Our fears.

Such joy to hold you in my arms

and kiss away all your tears.

But now you're gone, there's only the pain

and nothing I can do about it.

And I don't want to live this life any more,

If I can't live for you.

To my beautiful baby girl.

Our love will never die...