Should she tell her fiancé that she lost her virginity or should she cancel the engagement?

Praise be to Allah.

This calamity is not the first and it will not be the last. The strongest temptation is the temptation of men by women and of women by men. 

Shaykh al-Islam Ibn Taymiyah (may Allah have mercy on him) said: 

The mixing of one gender with the other is the cause of fitnah. When men mix with women, it is like mixing fire and wood. End quote. 

Al-Istiqaamah, 1/361 

This is the fire that was lit between them, then he left her after committing immoral actions with her, and went to someone else. 

It is also something that happens repeatedly: he deceives her, then he commits immoral actions with her, then he leaves her and, for marriage and starting a family, he looks for a woman whom he can trust. But, unfortunately, no one learns this lesson and understands the true nature of the deceit until it is too late, or before regret sets in when regret is to no avail? 

We ask Allah to accept her repentance and that of every sinner, and we pray that she will learn from this experience the hard and bitter lesson of how Allah wants guidance and righteousness for His slaves, whereas the Shaytaan and his cohorts want to misguide them and lead them astray. 

Allah, may He be exalted, says (interpretation of the meaning):

“Allaah wishes to make clear (what is lawful and what is unlawful) to you, and to show you the ways of those before you, and accept your repentance, and Allaah is All‑Knower, All‑Wise.

27. Allaah wishes to accept your repentance, but those who follow their lusts, wish that you (believers) should deviate tremendously away (from the Right Path).

28. Allaah wishes to lighten (the burden) for you; and man was created weak (cannot be patient to leave sexual intercourse with woman)”

[al-Nisa’ 4:26-28]. 

But what has happened has happened. Now the most important thing that your friend has to do is to repent, and the greatest right that she has over you is that you should help her to repent sincerely and to regret what has passed, and to understand the effects of the Shaytaan’s trick on her, in the hope that Allah will accept her repentance and conceal her with His beautiful concealment. 

With regard to her engagement, she should go ahead with it, so long as she thinks that the young man is good and righteous. She should not repair the hymen that was broken because of this immoral action, because this is deceit and cheating; but at the same time she should not expose herself to scandal. Rather she should go ahead with that as Allah wills; perhaps Allah will conceal her. 

If her husband does not find out about that after marriage and Allah conceals her, then she should continue as she is. 

If he finds out that the hymen had been broken, she can hint that it was broken as a result of an accident or some such; hymens are often broken as a result of such things. 

See also the answers to questions no. 844, 96214 and 70273. 

If that is not possible, and the husband finds out that the hymen has been broken, he may annul the marriage, if he wants to, and take back what he had given her of the mahr and costs of the marriage. 

Perhaps if she tells him about what happened, he will conceal her. But the annulment of her marriage, even after a short time, may be better and more concealing for her, because after that she will be a divorced woman and when she gets married again, it will on the basis that she was previously married. 

And Allah is the source of strength and the Guide to the straight path.