It was decided the project to develop a 43,000-seater stadium at the north London site would have cost too much money.
It now appears inevitable that the 2005 championships will not be held anywhere in the UK.
The decision to scrap the Picketts Lock project follows a review by troubleshooter Patrick Carter which identified the original £87m ($129m, B141m) scheme would actually cost significantly more.
Sports Minister Richard Caborn and Culture Secretary Tessa Jowell came to the conclusion after lengthy discussions with UK Athletics.
The outcome is a huge embarrassment for the government, which had promised to bring the championships to the UK in its election manifesto.
It is also a big blow for British hopes of staging the 2012 Olympics.
Ministers will meet with the IAAF on Friday to discuss moving the venue.
However, the IAAF has previously said that if the Picketts Lock project did fall through, it would not allow UK Athletics to simply change the venue to another city.
"The championships were awarded to London and to change the city is impossible." said IAAF spokesman Giorgio Reineri.
"Like the Olympics, if you change the city you change everything."
The government is believed to be in favour of holding the event at the Don Valley stadium in Sheffield, north England.
Britain's credibility as a major sporting event venue has been undermined after the British Government abandoned plans to stage the 2005 World Athletics Championships at Picketts Lock, north London.
