FDJ rider William Bonnet of France was put in a neck brace after falling off his cycle when it apparently touched a wheel, and others around him were also brought down in a flurry of flying bikes and bodies.
Swiss Cancellara, who started the day with the leader's yellow jersey, was one of several top names to hit the tarmac, along with Australian Simon Gerrans and Dutchman Tom Dumoulin who had to abandon the race.
"Just left the hospital with a huge disappointment #TDF2015 is over," Cancellara wrote on his Twitter feed.
His Trek Factory team said he broke two vertebrae in his lower back.
When organisers neutralise part of a stage it means riders must move at minimal pace and no breakaways or time gains can be attempted.
Bonnet was conscious when he was taken away by medical staff on a stretcher.
"He's lucid, he's wearing a neck brace out of precaution," said FDJ sports director Thierry Bricaud.
FDJ said that Bonnet suffered a broken cervical vertebra.
"This fracture means he needs to undergo surgery quickly to stabilise the vertebrae and avoid neurological consequences," FDJ said in a statement.
"But the fracture in itself is not serious."
At one point Team Sky riders accelerated before Cancellara made his way back to a bunch that was riding at the minimum pace required when a race is neutralised.
Organisers then decided to stop the race altogether and the peloton came to a halt 55-km from the finish before resuming the stage.
"Due to the extraordinary circumstances of the crash at a very high speed, the race was neutralised to allow the injured riders to get back in the peloton," organisers said in a statement.
"Twenty-five minutes after the crash a new start was given at the top of the Cote de Bohisseau with 50 km to go."
Sky manager Dave Brailsford said: "It was a good decision. I think (race director) Christian (Prudhomme) did the right thing.
"I like to see people who look at the rules and understand the situation and contextualise their decisions based on the current situation that they're in."
(Editing by Mitch Phillips and Clare Lovell)
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