Basso’s place in the team will be taken by Damiano Caruso.
The 35-year-old Italian, winner of the race’s pink jersey in 2006 and 2010, finished the race in fifth place last year but will take no part in this year’s 96th edition.
The cyst was discovered Wednesday and despite efforts to cure the problem Cannondale said Basso would not be participating.
“This morning, upon waking, after a further evaluation of the lesion it was clear that there was no chance of Ivan pedalling during the next days,” said a team statement from Cannondale.
“Dr. Corsetti, in agreement with the athlete, and with the team, decided that it was best not to start the race.”
The Giro begins in Naples on Saturday and is likely to finish in a bunch sprint. The race ends on May 26.
Britain’s Bradley Wiggins, the reigning Tour de France champion, has made the Giro his primary objective this season and is expected to duel with Italian Vincenzo Nibali, among others, for the race’s pink jersey.