Any group caring for children for more than six hours a week could have faced inspection under the new counter extremism policy.
Many had feared the wide definition of the new law, which would have targeted places teaching things at odds with 'British values', could have left some churches in trouble.
Ministers will now remove the need for churches to register after a meeting with the Archbishop of Canterbury.
Most Revd Justin Welby is said to have raised the concerns of many within the Church with senior government officials.
A campaign against the proposals had cross bench support in the House of Commons plus groups like the Evangelical Alliance had spoken out against the plans.
Conservative MP Sir Gerald Howarth campaigned against the new rules which he said "just did not comply with common sense."
He told Premier: "There was huge concern and also a sense of bewilderment.
"People couldn't understand why it was that in order to address the threat that we face from these extremist groups that somehow Sunday schools should be caught up in it.
"It was completely bewildering."
Speaking to the Sunday Times a government source said: "The church thought this idea of registration too draconian, that requirement has now been dropped. It still means that Ofsted can go in if there is reasonable cause, but it will remove the requirement to register."
Last week the MP who works as a link between the government and the Church of England told the House of Commons the plans were under review.
Addressing the issue in Parliament on Wednesday, Caroline Spelman, who represents the Church Commissioners, said: "Representatives of the Church of England have taken part in detailed consultations with the Government over the proposals to regulate out of school settings.
"I recently led a delegation of backbenchers at the Cabinet Office.
"We understand that this policy remains under review and I'm hopeful that something will emerge which meets the key concerns that those of us have voiced."