"It's very, very sad that they have decided to split. It's very amicable but they have decided to go their separate ways," the source said.
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 also recently made a rare public appearance together in the stands at Wembley Arena at a We Day UK charity event.
Kensington Palace declined to comment on the claims.
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.
It's very, very sad that they have decided to split. It's very amicable but they have decided to go their separate ways
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.
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.
The pair are said to remain "the best of friends".
The Duke and Duchess of Cambridge split briefly and amicably during their long term relationship, four years before they married, which is likely to prompt speculation that Harry and Cressida's decision to separate may eventually be temporary.
Harry's most serious previous girlfriend was Chelsy Davy with whom he had a long-distance relationship while the Prince was training in the Army and overseas and while Chelsy was at university in South Africa.
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