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The casino company blamed the "current economic conditions and the unprecedented disruption in the financial markets" for the decision not to proceed with plans to build the proposed $535 million resort, according to a statement.
The statement said it "was impossible" to finance the project now.
Harrah's Vice Chairman Chuck Atwood said in August when the contract was awarded that the partnership was confident the project could get financed.
"The appeal of the project was helpful as we talked to lenders," Atwood said. "They recognize the project has a lot of appeal, so we're confident it can be financed."
The announcement comes less than three months after the state Lottery Gaming Facility Review Board chose Sumner Resorts-Harrah's Kansas by a 4-3 vote over proposals from Penn National Gaming and Marvel Gaming.
MGM Mirage withdrew its bid proposal in May.
Harrah's was awarded a 15-year management contract that calls for 22 percent of the casino's revenue to go to the state.
The proposed 175-room resort and neighboring golf course, which was scheduled to open in late 2010, was slated for Mulvane, a small town 15 miles south of Wichita and 150 miles north of Oklahoma City.
Also on Monday, Harrah's Entertainment said it offered a private exchange for some of its near-term debt to take advantage of depressed bond prices and free some equity.
The company hopes to issue $2.1 billion of new 10 percent notes due 2015 and 2018, pushing current maturity dates back at least five years.
Harrah's will also offer up to $325 million in cash for near-term maturities instead of notes.
The bonds involved in the offer are prioritized beginning with $2.1 billion worth of prebuyout notes maturing between 2010 and 2013, followed by $2.5 billion worth of notes maturing between 2015 and 2017. Notes maturing in 2016 and 2018 representing $6.8 billion worth of debt have lower priority.
KDP Investment Advisors bond analyst Barbara Cappaert said in a note to investors that Harrah's debt load could be reduced by $3 billion if the exchange is successful.
The bond exchange comes as Harrah's co-owner Apollo Management is trying to avoid default on Harrah's debt during an economic downturn that has hit casino companies hard.
"The idea is to get through a financial squeeze," Martin Fridson, chief executive officer of money management firm Fridson Investment Advisors in New York, told Bloomberg News.
Although the exchange would give the company more time on its debt obligations, it would have little effect on the company's cash flow and would still leave Harrah's heavily leveraged.
The company reported $24.1 billion in debt at the end of the third quarter on Sept. 30.
Harrah's spokeswoman declined to comment on the exchange, referring to the company's filing Monday with the Securities and Exchange Commission.
Private equity companies Apollo and TPG Capital purchased Harrah's and took it private this year.
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