The Federation of Small Businesses (FSB) said the loss of events like the Edinburgh International Festival, Fringe and Tattoo would "magnify an already desperate situation" for hotels, bars, shops and restaurants.
Research published five years ago found that the festivals, which have had a combined audience of more than 4.4 million in recent years, were worth more than £300 million to the economy and support more than 5600 full-time jobs in the city.
The FSB said the "double whammy” of the impact of the coronavirus crisis and the cancellation of the festivals "may be too much to bear" for local businesses over the next few months.
It has called for extra support for the business sector to be provided by the city council and the Scottish Government to help offset the loss of income.
Andrew McRae, policy chair at FSB Scotland, said: "With the world in the grip of the coronavirus pandemic, it sadly comes as little surprise that the decision has been taken to cancel this year’s Edinburgh festivals.
"Health concerns must come first and with little clarity on what the public health situation will look like in the summer, the decision to cancel was undoubtedly correct.
“It is equally clear that without these major events, the economic impact on businesses in Edinburgh and the surrounding area will hugely magnify an already desperate situation. Many local businesses across a range of sectors will be catastrophically impacted.
"From accommodation providers to shops and from restaurants to performers, the impact on individual businesses will be vast.
"The festivals draw an additional 4.4 million people to Edinburgh each August and the loss of these will cost local businesses many hundreds of millions of pounds.
“Whilst every business across Scotland is suffering to a greater or lesser degree at the moment, we are calling for additional local support for businesses in and around Edinburgh to help cope with this double whammy.
"Without this, the compounded effect of coronavirus and the loss of the festivals may be too much to bear.
"It’s time for national and local government to step up to the plate and secure the future of the jewel in the crown of Scotland’s tourism economy.”