"Despite the fact that the Azerbaijani authorities have given security guarantees to all participating countries, several days ago the Azerbaijani president made a statement that enemy number one for Azerbaijan was Armenians," Armenia's Public Television station said in a statement.
"There is no logic to sending a participant to a country where he will be met as an enemy," the statement said.
The organiser of the pop extravaganza, the European Broadcasting Union (EBU), expressed disappointment over the "unfortunate" decision.
"We are truly disappointed by the broadcaster's decision to withdraw from this year's Eurovision Song Contest," the contest's executive supervisor, Jon Ola Sand, said on the EBU's website.
"Despite the efforts of the EBU and the host broadcaster to ensure a smooth participation for the Armenian delegation in this year's contest, circumstances beyond our control lead to this unfortunate decision," he said.
A senior Azerbaijani politician reacted by saying that Armenia had no genuine reason to boycott the competition in Baku.
"The Armenian refusal to take part in such a respected contest will cause even further damage to the already damaged image of Armenia," the executive secretary of the governing party, Ali Ahmedov, told journalists.
Azerbaijani and Armenian forces fought a war over the disputed region of Nagorny Karabakh in the 1990s which left some 30,000 people dead, but despite years of negotiations since the 1994 ceasefire, no final peace deal has yet been signed.
There are still frequent gun battles along the front line, and Azerbaijan has repeatedly threatened to use force to win back the enclave if talks fail while Armenia has warned of massive retaliation to any military action.
A group of Armenian pop singers launched a Eurovision boycott campaign last month.
"We refuse to appear in a country that is well known for mass killings and massacres of Armenians, in a country where anti-Armenian sentiments have been elevated to the level of state policy," the 22 singers including three former Armenian Eurovision contestants explained in a statement.
The campaign was launched amid anger at the reported shooting of an Armenian soldier by an Azerbaijani sniper, but it ran into controversy after officials announced that he had actually been killed by a fellow serviceman.
One prominent Armenian blogger described the campaign and the boycott as "a disgrace".
"They could have announced it much earlier, with dignity, with a kind of reasoning that would have gained them respect. Instead, they resorted to stupid propaganda games and outright lies," wrote blogger Mika Artyan.
Eurovision deleted comments on the issue from its official website shortly after the news was announced following a series of furious exchanges between Armenians and Azerbaijanis.
Azerbaijani singers Ell and Nikki won Eurovision in Duesseldorf in May 2011, giving the oil-rich ex-Soviet state the right to host the contest this year.
The Azerbaijani administration sees Eurovision 2012 as a chance to boost the international profile of a country until now mainly known as an energy exporter on the fringe of Europe.
Despite its reputation as kitsch entertainment, Eurovision has been hit by political rows in the past.
Georgia also pulled out in 2009 after its entry was rejected because it poked fun at Russian Prime Minister Vladimir Putin following a war between the two countries the previous year.
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