The decision was made by New Zealand Rugby after meetings with both teams, as well as venue management at Forsyth Barr Stadium and police.
At least 49 people were killed in separate attacks on two mosques in Christchurch on Friday, horrifying New Zealanders and the world.
The nine-times Super Rugby champion Crusaders are based in Christchurch.
"Advice from police and venue management was that the fixture could go ahead, however, with strong agreement from both teams we have made the final call not to proceed as a mark of respect for the events that have occurred in Christchurch," NZR chief rugby officer Nigel Cass said.
Players were encouraged to go home to their families, while the Highlanders said all ticket refunds would be processed over the next three weeks.
Both teams will take two competition points from the match.
Crusaders chief executive Colin Mainsbridge said the club, players and community were deeply shocked by Friday's events.
"All other issues and considerations pale in significance," Mainsbridge said.
"We will now regroup and make arrangements for the team to return home."
A crowd of more than 20,000 had been expected for the match but Highlanders chief Roger Clark said he fully supported the decision.
The match is the second cancellation of a high-profile sporting event this week, alongside the third cricket Test between New Zealand and Bangladesh, which had been scheduled to begin in Christchurch on Saturday.
Members of the Bangladesh team narrowly avoided being caught up in the shooting at the Al Noor mosque when they arrived for Friday prayers.
The Crusaders' Super Rugby clash with the Hurricanes in late February 2011 was also scratched after devastating earthquakes flattened much of central Christchurch and killed almost 200 people.
With AP, Reuters
