Speaking on a visit to Turkey, he said Russia would instead look at creating a gas hub on the Turkish-Greek border.
Mr Putin blamed European opposition to the South Stream plan, which was funded by Russia's state gas giant Gazprom.
The pipeline was to have run under the Black Sea to southern and central Europe, providing another transit route for Gazprom.
But the EU has been worried about the gas producer also owning a pipe network.
Construction work on the 930km (580-mile) South Stream project began in Bulgaria in October 2013 but was suspended in June after the European Commission said it may be breaking EU competition rules.
Russian officials accused the commission of blocking the work for purely political purposes.
"Taking account of the fact that until now we have not received permission from Bulgaria, we believe that in the current conditions Russia cannot continue with the realisation of this project," said Mr Putin, speaking alongside Turkish President Recep Tayyip Erdogan in Ankara.
"If Europe does not want to carry out (South Stream), then it will not be carried out, We are now going to focus our energy resources in other directions."
Mr Putin said Russia could build a gas hub on the Turkish-Greek border to supply Europe with gas to compensate for the loss of South Stream.
The head of Gazprom, Alexei Miller, later confirmed that the pipeline was finished.
"The project is closed," he told reporters.
Relations between Russia and the EU have been badly hit by the crisis in Ukraine.
The EU and the US have imposed sanctions on a number of Russian individuals and companies following Russia's intervention in Ukraine, but Gazprom has not been targeted.
Gazprom supplies 30% of Europe's gas - some 15% of it via Ukraine.
Bulgaria, an EU state, has said it feels it is being targeted by Brussels as a means of retaliating against Russia over the situation in Ukraine.
Russia and Turkey are major trading partners. Russia provides the bulk of Turkey's gas requirements and is set to build Turkey's first nuclear power plant.
Russian President Vladimir Putin says the proposed South Stream gas pipeline will not go ahead.