Tutu's decision forms a protest against Blair's decision to back the United States war in Iraq.
"The archbishop has spent considerable time over the past few days wrestling with his conscience and taking counsel from trusted advisers with respect to his attendance at the event," the archbishop's office wrote to the event organisers on Tuesday.
"Ultimately, the archbishop is of the view that Mr Blair's decision to support the United States' military invasion of Iraq, on the basis of unproven allegations of the existence in Iraq of weapons of mass destruction, was morally indefensible.
"The Discovery Invest Leadership Summit has leadership as its theme. Morality and leadership are indivisible. In this context, it would be inappropriate and untenable for the archbishop to share a platform with Mr Blair.
"The archbishop greatly regrets inconveniencing and disappointing the organisers and participants of the Discovery Invest Leadership Summit."
Following Tutu's decision, Blair released a statement.
"Obviously [Tony Blair] is sorry that the archbishop has decided to pull out now from an event that has been fixed for months and where he and the Archbishop were never actually sharing a platform.
"As far as Iraq is concerned they have always disagreed about removing Saddam by force – such disagreement is part of a healthy democracy.
"As for the morality of that decision we have recently had both the memorial of the Halabja massacre where thousands of people were murdered in one day by Saddam's use of chemical weapons; and that of the Iran-Iraq war where casualties numbered up to a million including many killed by chemical weapons.
"So these decisions are never easy morally or politically".
A group of Durban-based organisations want to arrest Blair on charges of war crimes when he arrives in South Africa.
"Various Muslim organisations are in talks about possible actions that will be carried out should Tony Blair visit South Africa," said Mustafa Darsot, a member of the South African Muslim Network executive committee.
"This includes protest marches outside the summit venue, possible sit-ins and legal action against Mr Blair. We have also asked various legal professionals to look at the feasibility of having a warrant of arrest issued against him."
Blair will join several big names, including chess master Garry Kasparov and Finance Minister Pravin Gordhan at the annual event, which will take place in Sandton on August 30.
Darsot said the network and several other organisations had written to Discovery Group founder and chief executive officer Adrian Gore urging him to withdraw the invitation to Blair. They did not believe he was "fit to lecture on leadership" because of his key role in the 2003 invasion of Iraq.
"Mr Blair is complicit in the murder of thousands of people in Iraq and should be tried for war crimes," Darsot said. "He violated the trust and responsibility of his office and it was his cosy and illegitimate relationship with the [Rupert] Murdoch press that prevented much of the truth about his role in the invasion of Iraq and murder of its citizens from being revealed in the press."
But Iona Maclean, head of Discovery Life and Discovery Invest Marketing, said the invitation to Blair would not be withdrawn.
"The Discovery Invest Leadership Summit brings together a range of leaders to debate the challenges that face the world's economy, business, government and society," she said.
"The event is not intended to reflect a political view or cause offence. Discovery Invest selected the speakers based on their experience as leaders from various spheres of society and we will not be withdrawing our invitation to any of the speakers."
Patrick Bond, director of the Centre for Civil Society at the University of KwaZulu-Natal, said there was no question that Blair could be prosecuted for a "crime of aggression".
"The website arrestblair.org spells out Blair's role in recent mass murder from the Middle East to Central Asia," he said.
"Since Pretoria politicians justifiably complain that the International Criminal Court mainly prosecutes African tyrants, leaving European and American war criminals to travel the world gathering huge speaking fees, some action by Foreign Minister Maite Nkoane-Mashabane would reduce the talk left, walk right accusation against South Africa. She might simply follow the recent lead of Malawian President Joyce Banda, who warned Sudanese President Omar al-Bashir to stay away from Lilongwe on threat of arrest."
Bond said if Nkoane-Mashabane did not intervene, South Africans who viewed Blair as a war criminal could attempt a citizen's arrest.