Hotel industry leaders described the move by the city council and organisers Underbelly as "a serious setback" for the struggling sector's recovery.
It claims thousands of jobs are at "severe risk" of being lost due to the demise of major events in the city, as well as a slump in international visitors and corporate business.
The Edinburgh Hotels Association said the Christmas festival had been expected to deliver vital "stimulus" for businesses due to its track record of attracting "high-spending" visitors on short breaks.
It said there was no prospect of "a festively-decorated city" and its hotels, bars and restaurants being able to "compensate" for the loss of the event, which attracted 2.6 million people into Princes Street Gardens last year.
The plug was pulled on the Christmas festival, which has been worth more than £110 million to the economy, in the face of growing concerns about the safety risks of crowds flocking to open-air market stalls and fairground rides.
Council leaders called off the Hogmanay street party in July, but hoped that spreading out Christmas attractions across the city would have ensured that social distancing restrictions could be met.
However during crunch talks ordered after new restrictions were imposed across the country it was agreed to avoid staging anything which "could attract a gathering or crowd.”
The hotels association said advance bookings for the first and second weeks in December were running at just 20 and 17 per cent respectively.
Last year nearly 80 per cent of hotel rooms were filled in December, at an average room rate of £109.
Association spokesman Russell Imrie said: "The cancellation of the Christmas festival is yet another serious setback for the recovery of the hotel sector.
"Due to the cancellation of the summer festivals and the currently very restricted corporate, international and domestic tourism, hotels were hoping that the Christmas festival would provide a good stimulus to visit Edinburgh and at least help hotels when they need it most.
"The Christmas and Hogmanay festivals have enabled hotels to be almost fully booked with high spending international and UK visitors who benefit the city’s bars, restaurants, taxis, attractions and retail. All this is going to be missing.
"Online events, a festively decorated city and attractive hotels, bars, restaurants and retail cannot compensate for absence of festivals which create demand to visit the city.
"Hotels in the city are now in a crisis situation as most have been operating at a loss for many months.
"Most still have many team members on furlough and as the job retention scheme comes to an end at end October, it is employees and their families who are going to be most affected.
"Everything is against hotels and hospitality at present and many hotels are feeling rightly disappointed and deeply concerned that coronavirus protection measures adversely affect hospitality more than any other business.
"The 'rule of six,' the 10.00pm closing time, an inability to host weddings, restrictions on Christmas parties and conferences, and new work-from-home messaging are all preventing hotels becoming viable and are placing thousands of jobs and many businesses at severe risk."