The Lantern Festival at Yuyuan Garden was called off "based on considerations of safety," the organisers have said on an official microblog.
The festival has been held at Yuyuan Garden for 20 years and typically draw massive, but sometimes unruly, crowd.
For many in the city it is a custom to enjoy beautiful lanterns and walk along Jiuqu Bridge to mark the traditional end of the Spring Festival.
The Deputy Governor of Huangpu District, which makes up the eastern part of Shanghai's traditional urban core, Wu Cheng said even though the display has been cancelled they would still have the same security measures as Yuyuan Garden is a popular gathering place during festivals, state-run Shanghai Daily reported.
There was some speculation that the cancellation was liked to the New Year's eve stampede on Shanghai's historic waterfront that left 36 people dead, it said.
Another Lantern Festival celebration at Guyi Garden in Jiading District was earlier cancelled for "safety reasons.