Further confirming the news, a member of the website Animation Nation gave some further details about Disney's decision...
John Lasseter and Ed Catmill announced to Feature Animation employees today that the Toy Story 3 production will end effectively today. They said that sequels should only be made if there is a really great story that demands it, and should be the domain of those who created the original film.
In other words, if Pixar wants to make a sequel to its films, it will. If Disney Feature wants to make a sequel to its film, it will. But the two will not cross.
They said they were interested in the talent assembled for Circle 7, and would try to accomodate that talent--they were sort of vague. But they said they held no prejudice at all towards those who were at Circle 7, and wanted to find a way to use their talents.