The cartoon competition was set to take place in the PVV chamber in the Tweede Kamer, the lower house of Dutch parliament, in November.
Physical depictions of the prophet are forbidden in Islam and are deeply offensive to Muslims.
A Dutch judge is extending by two weeks the detention of a 26-year-old man who allegedly threatened to attack the organizer of a Prophet Muhammad cartoon contest.
"To avoid any risk of victims of Islamic violence, I made a decision to cancel the contest", Wilders said adding: "People's safety comes first".
"Islam showed its true face once again with death threats, fatwas and violence", Wilders said in a tweet.
The Dutch prime minister, Mark Rutte, distanced his government from the event and labelled it "disrespectful" but said it could go ahead on the grounds of freedom of expression.
Pakistan deployed thousands of troops to protect a diplomatic enclave in the capital on August 30 as angry protesters approached Islamabad. Earlier this week, a disgraced cricket player from Pakistan offered a bounty of three million Pakistani rupees (£189,000/$244,000) for the killing of "the Dutchmen" behind the contest. "His aim is to be provocative", Rutte said.
The anger sparked by Wilders' plans in Pakistan had prompted the Netherlands to caution citizens about travelling there and to postpone a planned trade mission to the South Asian country.
Earlier, Federal Minister for Religious Affairs, Noorul Haq Qadri, held a meeting with the TLP chief to convince him to cancel his march, arguing that the government had already taken enough steps to raise the issue at all worldwide forums.
Wilders announced the contest in June and claimed to had received 200 entries so far.
TLP members are staunch supporters of the controversial blasphemy law and openly justify violence to safeguard what they call the honor of the prophet.
Foreign Minister Qureshi had raised the issue of the blasphemous cartoon caricature competition with the Dutch foreign minister and also called upon the OIC to summon an urgent session for adopting a unanimous position in response to the planned Dutch blasphemous event.