According to sources who spoke to ESPN, the 35-year-old Cotto balked at paying the World Boxing Council a $300,000 (£197,167) sanctioning fee in a bout that could earn him up to $30 million.
The 25-year-old Alvarez, the former unified junior middleweight champion, would claim the WBC middleweight crown should he defeat Cotto, the WBC said.
There was no immediate comment from the Cotto camp.
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"The WBC's decision is premised on the fact that Miguel Cotto and his camp are not willing to abide by the governing WBC rules and regulations, and the specific conditions the WBC established to sanction thee fight," the WBC said in a statement.
WBC president Mauricio Sulaiman said in a piece on the boxing organisation's website that Cotto's decision not to sign the agreement for the Las Vegas fight was sad and disappointing.
"The fight is still there, it's a sellout and they're going to make millions and millions," Sulaiman said.
"Unfortunately, the sport was disrespected. If Canelo wins, he's the champion, if Canelo loses, we will move forward."
Sulaiman said that if Alvarez wins, his next fight would be against WBC interim champion Gennady Golovkin (34-0) of Kazakhstan.
(Reporting by Larry Fine in New York; Editing by Mark Lamport-Stokes)
