The move came as a senior US official said the United States was considering punishing Israel for the construction of a controversial security barrier in Palestinian areas, according to a source close to Abbas.
"Abu Mazen (Abbas) cancelled the meeting because he sees no serious sign from the Israelis about implementing the roadmap," the Palestinian source said on condition of anonymity, saying a central issue was Israel's reluctance to free a significant number of Palestinian prisoners.
The Wednesday meeting, was to have been the third bilateral meeting between the two prime ministers who last met in Jerusalem on 20 July before separate visits to Washington for talks with US President George W Bush.
"The Israelis would only use this event to exploit the release of only 400 or so prisoners, most of whom had already finished their sentences," he said.
On Sunday, Israel said it would free 442 Palestinian prisoners later this week, but it was a number that fell far short of thousands of releases eagerly awaited by the Palestinians.
Earlier last week Israel's cabinet said that 540 Palestinian prisoners were slated for release.
The peace process has hit an obstacle with Israel's reluctance to release more than a small fraction of the estimated 6,000 Palestinians it holds.
But it isn’t the only hurdle diplomats are contending with.
The wall may cause tensions
between Israel and Washington
In Washington, a senior US official said the Bush administration may punish Israel by withholding US loan guarantees if Israel continues with the construction of the so-called security wall along the West Bank.
"It is something that is being looked at," the official told French news agency AFP on condition of anonymity.
"Real questions have been raised about the fence and we're discussing how we should express our concerns in a concrete way."
The official said the proposal was still being debated by the White House and the State Department and that no decision on it would likely be made before September.
Shortly after the official spoke, Secretary of State Colin Powell noted with disapproval that some stretches of the wall are being built on Palestinian territory, jeopardising the potential success of the US-backed "roadmap" for peace.
"In the case of the Israeli fence, we are concerned when the fence crosses over onto the land of others, and if it is constructed in a way which makes it more difficult to move forward on the roadmap, this causes us a problem," he said.
Powell did not address the question of loan guarantees, but the senior official's comments confirmed a report in the Israeli newspaper Haaretz, which said Sunday the penalties were a
In March, President Bush proposed an emergency spending bill that would give Israel an additional 10 billion dollars to help its ailing economy.
Nine billion dollars of that assistance, which has not yet been approved by Congress, would come in the form of loan guarantees.
If approved, the US would withhold promised loan guarantees in the amount Israel spends on the portions of the wall that protrude into occupied Palestinian territory.