The opposition decision came after its supporters, heading to a rally in the capital Harare, came under attack.
The opposition Movement for Democratic Change says some 86 supporters have been killed and 200,000 forced from their homes by ruling party militias.
At a press conference in Harare on Sunday, Mr Tsvangirai said: "We in the MDC cannot ask them to cast their vote on 27 June, when that vote could cost them their lives."
"We have resolved that we will no longer participate in this violent, illegitimate sham of an election process."
"We will not play the game of Mugabe," he added.
He called on the United Nations, African Union and the southern African grouping SADC to intervene to prevent a "genocide" in Zimbabwe.
Tsvangirai quits election race
Zimbabwe's Information Minister Sikhanyiso Ndlovu told the BBC that Mr Tsvangirai pulled out the vote because he faced "humiliation and defeat" at the hands of President Mugabe, who he said would win "resoundingly".
"Unfortunately," he said, the opposition leader's decision was "depriving the people of Zimbabwe of a vote".
BBC Africa analyst Martin Plaut says the key question now is what Thabo Mbeki, president of Zimbabwe's powerful neighbour South Africa, will do.
He is in the best position to step up the pressure on Mr Mugabe, since Zimbabwe is so economically dependent on South Africa, our analyst says.
Some opposition supporters at the rally were captured and beaten
South Africa immediately responded to the news by calling on the MDC to continue talks to try to find a political solution.
"We are very encouraged that Mr Tsvangirai, himself, says he is not closing the door completely on negotiations," said a spokesman for Mr Mbeki.
On Sunday, the MDC was due to stage a rally in Harare - the highlight of the campaign.
But supporters of Mr Mugabe's Zanu-PF occupied the stadium venue and roads leading up to it.
Witnesses reported seeing hundreds of youths around the venue wielding sticks, some chanting slogans, and others circling the stadium crammed onto the backs of trucks.
Some set upon opposition activists, leaving a number badly injured, the MDC said.
It said African election monitors were also chased away from the rally site.
The United States reacted to Sunday's developments by saying: "The government of Zimbabwe and its thugs must stop the violence now."
Beatings and arrests
The MDC says Mr Tsvangirai won the presidential election outright during the first round in March.
The government admits he won more votes than President Mugabe, but says he did not take enough to win outright.
But in recent weeks, as the run-off approached, the MDC said it had found campaigning near impossible.
Mugabe will remain unopposed to seek revenge and retribution on all who stood for democracy and change
Its members have been beaten, and its supporters evicted from their homes, forcing it to campaign in near secrecy.
Mr Tsvangirai was arrested several times, and the party's secretary general, Tendai Biti, has been held and charged with treason.
The BBC's Peter Biles, in Johannesburg, says Mr Mugabe has made clear he will never relinquish power, saying only God could remove him.
While Mr Tsvangirai's move will hand victory to Mr Mugabe, it is unclear whether the international community or election observers will confer any legitimacy on the process, our correspondent says.
Britain's Foreign Secretary David Miliband told the BBC: "Robert Mugabe has certainly not won the election, in fact the only people who can claim that are the opposition," which won the parliamentary vote in March.
Zimbabwean ministers said the run-off vote would go ahead, unless Mr Tsvangirai submitted a formal letter of withdrawal.
But Levy Mwanawasa, president of neighbouring Zambia, said the run-off should be postponed "to avert a catastrophe in the region".
He said Zimbabwe's economic collapse was affecting the whole region, and he called on SADC to take a similar stance.
"It's scandalous for SADC to remain silent on Zimbabwe," he said.
"What is happening in Zimbabwe is embarrassing to all of us."
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