The insider said: "It's very, very sad that they have decided to split. It's very amicable but they have decided to go their separate ways.
Cressida had been widely tipped to marry Harry, with speculation growing in March after she joined the Prince at one of his official engagements for the first time.
They sat together and embraced in the stands at Wembley Arena at a We Day UK charity event.
Kensington Palace declined to comment.
One of the reasons the couple decided to call time on their relationship was thought to be so that Cressida, who is just 25, could concentrate on her career.
She completed a one year contemporary dance course at the Trinity Laban Conservatoire in Greenwich, London, last year.
The pair, who headed off on a skiing trip together to Kazakhstan in March, are said to have been introduced by the Prince's cousin and Cressida's friend Princess Eugenie - although they have moved in the same upper class circles for a number of years.
They began dating around May 2012 - reportedly getting together at The Valley festival on friend Arthur Landon's Hampshire estate.
They holidayed on Sir Richard Branson's Caribbean Necker island for Sam Branson's birthday in the summer of 2012.
The Prince headed to Afghanistan for a tour of duty and Harry and Cressida were reunited on his return, setting off for a ski break with Eugenie, Beatrice, Sarah, Duchess of York and the Duke of York. Harry and Cressida were spotted hugging on the slopes.
A summer of festivals and gigs in 2013 saw the pair spending more and more time together, including a weekend at the Queen's private Sandringham retreat in Norfolk. Rumours of an engagement started to surface just 18 months after they began dating.