When the prize was announced on Sept 17 last year, one of the organizers was Wang Shenggui, a division chief for the Beijing-based Association of Chinese Local Art.
However, according to a recent statement, the group said Wang was acting outside of his official capacity, and that plans to start the award were never discussed with association heads, who answer directly to the Ministry of Culture.
"Wang didn't tell us anything about the prize," said Zhang Houbang, the association's standing vice-president.
The group only became aware of it through media reports, he said, adding that the ministry called him on Sept 19 to demand an explanation.
Zhang stressed that the association's focus is limited to promoting Chinese art, and that Wang's involvement in the prize was not allowed.
Wang was subsequently dismissed for violating the rules, while his division, which focused on the preservation of traditional culture, was scrapped, said the statement.
The news could now derail efforts by the prize organizers to stage the second annual ceremony this year.
Liu Haofeng, executive chairman of the award committee, said he did not know about the association's statement until informed about it by China Daily on Thursday.