The channel, which had attracted around 100,000 subscribers, will close at the end of July after 18 months on the air. Artsworld programming included opera, documentaries on art and famous film directors.
Investors in the channel, which included BSkyB and the Guardian Media Group, were reported to be unwilling to pour more money into the channel.
The channel said that by closing the channel now, the company is in a position to honour its obligations to creditors and staff and it remained possible that a purchaser or new investor may come forward.
Artsworld cited the increased competition from the recently launched BBC Four as being a contributing factor and said that the corporation's new arts and culture channel was "lavishly funded".
In a statement, the company said: "Since Artsworld's launch in December 2000, the climate for all media businesses, even the largest, has been stormy. For a small company, recently launched and standing alone among hundreds of channels, progress has been difficult.
"With the arrival among those channels of BBC Four, lavishly financed by increased licence fees to compete in the same digital sector, survival has finally proved impossible."
The BBC denied that the launch of Four had any impact. According to a BBC spokeswoman: "John Hambley, chief executive of Artsworld, assured Greg Dyke a month ago that if Artsworld were to close it had nothing to do with the launch of BBC Four. In fact, he noted at the time that Artsworld had done considerably better this year than last. We are sorry to hear about the closure. We feel the channel added value and choice to the multichannel world."
Citing the effect the BBC has on the commercial sector is a tactic employed by many commercial rivals in the past. Commercial children's channel's including Nickelodeon and Fox Kids have complained about the impact of the BBC's two new children's channels.
There have been similar complaints from Channel 4 and BSkyB about the BBC's planned launch of BBC Three, which has already been delayed and is under investigation by the government.
The commercial rivals are worried about the impact its launch will have on their own entertainment channels E4 and Sky One.
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