The decision followed years of losses brought about by lukewarm reviews and lacklustre sales of Mizrahi's clothes, whose retail sales are $20m to $30m a year.
The closure means he will not be showing as part of New York's fashion week in November. He had been tipped to step into the super-brand mantle created by Donna Karan, Ralph Lauren and Calvin Klein.
Josephine Turner, from the Knightsbridge fashion boutique A La Mode, who has been selling his clothes since his first collection in 1987 said: "I am shocked. His clothes sell extremely well. Only the other day a lady bought one of his dresses for a launch party, and was inundated with inquiries about who designed it."
Michael Rena, executive vice-president of Chanel Inc, would not spell out the losses but told The New York Times: "He knew and we knew where we were heading. We told him there was a point beyond which we were not going to continue."
Industry insiders put the decision down to the label's lack of fashion identity. Past models include Mary Tyler Moore and his "New York Jewish Mom", Sarah Mizrahi, and his clothes reflect a 1950s prom dress or cocktail- hour look, with pretty 1950s- inspired dresses, colourful jersey separates - but not much else.
Tony Glenville, a fashion historian, said: "The main problem for Mizrahi was that his diffusion line, Isaac, did not work. The customer who wants the Mary Tyler Moore look cannot afford his version.
"What's more, he did not have a perfume, a stand-alone boutique or any product licences to keep his name going," he added.
The Wertheimer family, owners of Chanel, are cutting losses because of the recession in the Far East where sales of Chanel have been affected.
Mizrahi found fame in 1995 with the success of the film Unzipped, which was a high camp fly-on-the-wall look at the preparations for his fashion show, complete with supermodels and his ever present mother, Sarah.Reuse content