The former Atomic Kitten star's reported £250,000 per year contract has been terminated after four years.
The News of the World secured hidden camera footage apparently showing Katona snorting the Class A drug at home and published the story with accompanying pictures on Sunday.
Iceland has been forced to scrap a series of Christmas ads filmed by Katona two weeks ago, according to the Daily Mirror.
The supermarket chain last night issued the following statement: "We have been working with Kerry for four years.
"She has been a successful part of our advertising campaigns, but has also been through some tough times in her personal life.
"We have always stood by her. However, following the recent allegations, we feel it is impossible for Kerry to continue to work with us.
"We will continue to try to ensure she gets the most appropriate support, should she require our assistance."
The company's ads also feature Coleen Nolan and Jason Donovan.
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