The Aviva Premiership champions say the group game, scheduled for January 14, will now take place in London.
It would have been the first Heineken Cup match to be staged outside Europe.
Saracens travel to Biarritz this weekend for the second match of their European season, having opened it with a bonus-point victory over Treviso last Sunday.
"Now that all discussions between various stakeholders have been concluded, Saracens has decided the Heineken Cup match against Biarritz on Saturday January 14 will be played not in Cape Town, but in London," read a Saracens statement.
"The innovative English champion club was eager to host the first Heineken Cup match ever played outside Europe, to stage a special, spectacular rugby event and to project brilliant images of Cape Town and European rugby around the world.
"However, we have no wish to be a catalyst for conflict between the City of Cape Town and the Western Province Rugby Union.
"Saracens looks forward to playing a competitive match in Cape Town as soon as local circumstances allow.
"Supporters who have bought tickets in South Africa will be fully refunded by Computicket, and Saracens will engage with UK-based supporters who have already booked air tickets and accommodation and ensure they are appropriately compensated."
Saracens had hoped to stage the Biarritz return fixture at Cape Town Stadium, a facility built for the 2010 soccer World Cup.
That request was considered by the Western Province Rugby Football Union's executive committee, but they decided the game should be played at Newlands, Cape Town's traditional home of international and provincial rugby.
"According to the South African Rugby Union constitution, the final decision regarding the match venue lies in the hands of the host union," said the Western Province RFU, in a statement released earlier this week.
"The WPRFU executive committee unanimously agreed that Newlands is currently the home of rugby in the Western Province, and will be treated as such for the foreseeable future.
"Newlands is one of the oldest rugby stadia in the world, with excellent facilities, and currently boasts some of the highest attendance levels in world rugby.
"The decision to agree to the hosting of the match at Newlands was made in the best interests of Western Province rugby, and once again shows loyalty to its suite holders and fans who regularly attend matches at Newlands."