Justice Secretary Jack Straw had included the data sharing measures in the Coroners and Justice Bill, but the Ministry of Justice (MoJ) spokesman said that the plans are being scrapped.
"We have taken on board everybody's criticisms and comments and decided that it would be better to look at this again," said the spokesman. "We will now have a public consultation on the issue."
The Government had proposed relaxing restrictions on the sharing of information between Government departments, agencies and even the private sector. It said its aim was to increase Government efficiency, but the plans were widely criticised.
Data protection campaigners said that the plans increased the chances of breaches of people's privacy. Privacy watchdog the Information Commissioner's Office (ICO) criticised the proposals and said that they did not offer people's personal data enough protection.
"The Bill’s information-sharing provisions are too wide, and its safeguards relatively weak," said the ICO. "The provisions should only apply in precisely defined circumstances where there is a legal barrier to information sharing that would be in the public interest."
Protests about the plans were lodged by groups representing doctors, patients, psychiatrists, independent schools and taxi drivers.
The MoJ spokesman did not give a likely time frame for the public consultation on new plans or for their introduction.
The ICO had initially said that it did not believe the plans were a threat to privacy, but later issued a second opinion containing criticism of the proposals.
It said that it had worries that the data sharing provisions could be used to change, without going to Parliament, the way that Government as a whole used and treated information.
"The Bill needs an additional safeguard, to prevent the use of information-sharing orders in the context of large-scale data sharing initiatives that would constitute significant changes to public policy," said the opinion.
Opponents of the move were also concerned that the plans could have allowed information from the public sector to be shared with the private sector without the knowledge or consent of the person who was the subject of the information.
Rosemary Jay, a privacy expert at Pinsent Masons, the law firm behind OUT-LAW.COM, warned when the plans were announced that the law did not restrict sharing to the public sector.
"It would allow for information to be shared with banks or other financial institutions. There is no restriction on purpose of the sharing so for example it would enable the Minister to make an order empowering the tax authorities to disclose the earnings of individuals to credit reference agencies," she said.
The MoJ spokesman said that the law was planned after recommendations made in a Government-ordered review of data sharing carried out by Dr Mark Walport and Information Commissioner Richard Thomas. He said, though, that before any more plans are made on data sharing the Government would go through a public consultation process.