The Jerusalem Open House, in charge of the August 10 parade, announced the cancellation in a statement quoted on the Israeli English news website Ynet on Friday.
It said: "This is not the time for celebrations.
"The parade, which requires extensive security, will not take place due to the situation."
But it said the parade would be held if security improved in the country.
Hagai Elad, the Open House director, said: "We are determined to fight for our right to march in Jerusalem this year; we will not succumb to the violent incitement against our community and against all the proponents of democracy in Jerusalem."
The organisation said that other events scheduled to take place during Jerusalem WorldPride 2006, from August 6 to 12, would go ahead. These include conventions, exhibits, performances and a film festival.
Israel has been locked in violence with Hezbollah since the kidnapping of two of its soldiers by the Lebanese Shia group on July 12.
The Israeli offensive has killed at least 362 people in Lebanon and Hezbollah has fired hundreds of rockets at northern Israeli towns and clashed with soldiers, killing 34 people.
The gay pride parade has been harshly criticised by religious Jewish groups in Israel which sought to have it cancelled by the city council.
Flyers distributed in Jerusalem's Haredi [Ultra-Orthodox] community said: "Anyone with the ability to do so has the duty to do everything he can to smash the jaws of evil in any way that he can."
The document was signed by the leading rabbis of the Haredi community.