The decision was made following Friday morning's workout.
"He's got tendonitis in his left front tendon," O'Neill said. "He's not 100 percent and I ain't taking any chances."
O'Neill told the Daily Racing Form he noticed some swelling on the left front leg Thursday and it returned following a Friday jog and gallop. He said the colt needs to do "absolutely nothing" for three months.
"We don't want to take any chances," O'Neill said. "The bottom line is it's not tragic." But he said the situation is "heartbreaking."
Alex Waldrop, president and chief executive officer of the National Thoroughbred Racing Association, praised O'Neill and I'll Have Another's owner, J. Paul Reddam.
"It's very disappointing news obviously, but the connections of I'll Have Another are to be commended for placing their horse's best interests first and foremost," Waldrop said. "The health and safety of the thoroughbred must always be the paramount consideration regardless of any other circumstances."
It has been 34 years since there was a Triple Crown winner. Affirmed last captured the title in 1978, the 11th horse to do so.
I'll Have Another had pulled the 11th post position for Saturday's race and had been installed as the favorite. The scratch reduces the field to 11, with Dullahan the likely favorite. Dullahan finished third in the Kentucky Derby.
O'Neill said the condition will end I'll Have Another's racing year and he and Reddam will consider whether to retire the colt.