Havana, Rio de Janeiro, Istanbul and Leipzig in Germany were dropped from an initial shortlist after a unanimous decision of the IOC's executive board, International Olympic Committee president Jacques Rogge told a news conference.
Having survived the cull, the five cities have until July 6 next year to convince the IOC's membership to award them the world's most important sports event.
Rogge said it was possible one or more of the five cities could be removed from the list in May 2005 if the IOC did not believe they "could deliver".
"The exercise was to retain those cities who we believe would stage the best Games," Rogge said.
"I do not like the word 'rejection' but those cities we have not retained ? this in no way reflects that we do not trust these countries."
Paris, which last hosted the Olympics in 1924, is viewed as the front-runner for 2012.
In deciding host cities, IOC experts give the most weight to two categories - general infrastructure and accommodation.
The IOC wants to be sure the basic framework of a city is sufficient to take on the load of the Olympics in terms of transportation, security and sufficient hotel beds.
About 10,500 athletes are expected in Athens for August's Games. More than 200,000 people were accredited for the 2000 Games in Sydney.
Paris and London had been considered certainties to make the cut but their relief was still palpable in Lausanne.
PRIME MINISTER
"I am very pleased that London has been named a candidate city for the 2012 Olympic Games. But I am not surprised we have cleared this most important hurdle," the Prime Minister said in a statement.
"A huge amount of work has gone into ensuring London's bid will deliver a memorable Games."
New York bid chief Daniel Doctoroff was thrilled at making the five-city shortlist.
"New York's designation puts us in select company with the other great candidate cities on the road to 2012," he said.
"We look forward to an exciting international competition in the months ahead."
Leipzig had been considered too small, IOC president Jacques Rogge said. South America must wait at least another four years for a first host city following Rio's rejection.
Istanbul, selected as a candidate city when it was bidding for the 2008 Olympics, was particularly dejected by missing out.
"Only three years ago Istanbul was accepted as a candidate city for the 2008 Games ? and not now," bid director Yalcin Aksoy said.
"Were there any negative developments? No. On the contrary. What has changed? I find it difficult to answer this at this moment."
Havana was rejected for the second straight time because of weak infrastructure and inadequate accommodation, Olympic sources said.
FORMAL BIDS
Four years ago 10 cities were slashed to five at this stage in the race to stage the 2008 Games.
Along with Beijing -- which eventually won -- Osaka, Toronto, Paris and Istanbul were invited to submit formal bids.
Havana was axed along with Bangkok, Cairo, Kuala Lumpur and Seville.
All nine 2012 contenders launched their bids in January with the emphasis on compact and easily accessible venues.
Paris and London, which staged the Games in 1948, promoted the attractions of their celebrated landmarks.
Madrid is proposing a green Games, concentrating on public rather than private transport, New York is focusing on its energy, drive and spirit while Moscow promises to stage "the best, most compact Olympics ever".
Istanbul, making its fourth consecutive bid, called itself a "bridge between civilisations".
Leipzig, a city of only 500,000 people, had cited its size as an advantage while Rio had promised that all venues would be situated within a 26 km radius of each other.
