The 10-year-old pupils from St Aloysius Junior School in Camden, north London, have been practising for the school production since October.
The school applied for a licence last October from the musical's copyright agents, Musicscope, but learnt only last week that it was could not put on the show for two evenings this spring because Oliver is opening at the London Palladium in November.
Oliver is one of the most popular school productions. This is the latest example of what has long been regarded as an anomaly - the legal restraints prohibiting schools in the London area from staging productions of plays that are on in the West End, or are to be staged there.
Teachers and parents have long failed to understand how seeing a school production in a small, drafty hall will put people off seeing the same play done by professionals in a theatre, especially when the numbers involved are tiny.
The situation for schools in the London area is particularly bad at the moment as two of the favourite choices, Oliver and Grease, are barred to them because they will both be on this year in the West End.
Other musicals that are barred include Cabaret and Carousel, which schools throughout the country cannot perform. Andrew Lloyd Webber's production of Joseph and the Amazing Technicolor Dreamcoat, at the London Palladium was also barred.
Nick Allott, executive producer of Cameron Mackintosh Ltd, said: 'This is a mixture of law and custom and practice. This school started rehearsing without a licence and they shouldn't have gone ahead until they had a reply.
'Dozens and dozens of amateur groups including schools have applied to do Oliver and we can't give them the go- ahead. If 60 or 70 schools did it then the number of parents who might not come to our production could be quite large. You also get people making comparisons between the amateur and professional productions.'
Barbara Lambert, licensing manager at Musicscope, copyright agents for Oliver in the UK, said: 'Cameron Mackintosh would have asked for amateur licences to be withdrawn. It is the procedure.
'We feel terribly sorry for the children, but it is the teachers who are totally at fault. They started rehearsing the kids without a licence, just with an initial 'perusal' copy of the script that we sent them. And they should not have done.'
Frances Hughes, headmistress of St Aloysius Junior School, said the children were 'terribly upset' at the news.