On Monday, The Junta de Andalucia's tourism office said it was pulling its sponsorship as it tries to push through sweeping budget cuts for Spain's heavily indebted regions imposed by the central government.
It had agreed to provide 3 million euros in prize money for the October 18-21 tournament at Valderrama, won last year by Spaniard Sergio Garcia.
"This is extremely disappointing news to receive, especially at such a late date," O'Grady said on the Tour's website.
"We feel the disappointment not only for our members and all committed to broadcasting and reporting this tournament and the region on a global scale, but also for the many visitors, especially from northern Europe, who coincide their vacations with the tournament," he added.
"We will work with the Junta to rectify this situation both now and in the future."
The Andalucia Masters is the second Spanish Tour event to fall victim to the financial crisis this year after the Madrid Masters was cancelled due to the financial woes of the Spanish lender that was its main sponsor.
The Junta de Andalucia's tourism office said it would look at investing next year in golf projects that would attract visitors to the region but did not say whether this included funding a reinstated Andalucia Masters.
- Junta de Andalucia