Egypt has informed Israel that it would not be "appropriate" for the pilgrims to make the annual visit to the northern province of Beheira, foreign ministry sources said.
The Abu Hassira festival, which was made possible after Egypt signed a 1979 peace treaty with Israel, has repeatedly drawn angry reactions from residents of the village.
Several cases have been filed in court demanding that it end.
The decision to cancel the gathering came after several political groups launched a campaign against the influx of Israeli visitors.
The Los Angeles-based Simon Wiesenthal Centre on Wednesday slammed the decision, which it said was influenced by Egypt's Muslim Brotherhood, who have just claimed the lead in landmark post-revolution parliamentary elections.
"It is an ominous sign that they ascend to power in the Egyptian parliament, the Muslim Brotherhood's first act is to curb the religious freedom of Jews," said Rabbi Abraham Cooper, associate dean of the Wiesenthal Centre.
Abu Hassira is a renowned religious figure from Morocco, who fell ill and died in Egypt in 1880.
The pilgrimage was allowed under ousted president Hosni Mubarak, but efforts were made to keep it low-key.
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