The festival which was being held for the first time was called off on Thursday morning due to the town's Showground being flooded.
Organisers are currently contacting ticket holders to inform them of the cancellation of the festival which was due to start on Friday and run until Sunday.
The three-day festival was scheduled to feature leading lights in the UK's roots music scene, including The Waterboys, former Fairground Attraction frontwoman Eddi Reader and Eliza and Martin Carthy, members of the renowned Yorkshire coast Waterson-Carthy folk dynasty.
A spokesman for the event said: "Due to excessively heavy and consistent rainfall in the Ryedale and local areas the Pickering Folk Festival has unfortunately had to be cancelled for health and safety and environmental reasons.
"Several bore holes have been dug through the site and the water table has risen to with three inches of the surface.
"Due to the water table still rising and more rain forecast it will be impossible to proceed with the event.
"We fully realise the disappointment and inconvenience this will cause not only to our many customers but also the artists and staff of what would have been one of the premier folk events in northern England. We offer our sincere apologies and guarantee that every possible avenue was explored to keep the event open."
Eliza Carthy, is one of the leading lights of the UK folk scene.
She has twice been nominated for the Mercury Music Prize and in 2003 swept the boards at the BBC Radio Folk Awards, grabbing gongs for best singer, best album and best song.
She said: "I am very disappointed that Pickering has had to be cancelled. Sorry for the organisers too. I spend a lot of time out on the road and was really looking forward to playing near to home, seeing friends and family.'
Her father Martin from Robin Hood's Bay, who was scheduled to headline the festival's second stage on Sunday evening in collaboration with fiddle-player Dave Swarbrick, is one of the legendary figures of British folk music.
It was his arrangement of Scarborough Fair that Paul Simon stole for Simon and Garfunkel's hit version.
Carthy has been a stalwart of seminal bands Steeleye Span and the Albion Band. He was awarded the MBE in 1998, won the BBC R2 award for folk singer of the year in 2002 and in last year he and Swarbrick won the BBC's award for best folk duo.
He added: "It's a big shame. I know that York and Whitby have been flooded, so sad that Pickering was next in line."