The so-called 'Tenants' Rights Law' was set to be discussed at Sunday's Ministerial Committee for Legislation.
Church leaders say the legislation discriminates against Christians, restricts the rights of Christian institutions to deal with their property and threatens the very income that sustains the Church's humanitarian work and ability to maintain Holy Sites.
Those looking to implement the bill have pushed it through four times previously but the latest attempt as churches were celebrating Christmas was said to have shocked and offended local Christians.
Welcoming the withdrawal, His Beatitude Theophilos III, Patriarch of Jerusalem said: "The Church Leaders of Jerusalem welcome the withdrawal of this offensive and discriminatory bill that selectively harms Christians.
"I call upon Prime Minister Netanyahu to continue to honour his explicit promise to preserve the long-standing status quo between the Church and the State and promote religious freedom in Israel."
Speaking to ITV last week, Archbishop of Canterbury Justin Welby gave his support to the churches of Jerusalem battling this legislation.
He said: "The proposed law would have a very serious effect on the Christian churches in Jerusalem, the very place we are looking to at this time of year.
"There are issues in the bill that need to be looked at but this is not the right moment... I admire Prime Minister Netanyahu reflecting Israel's reputation for freedom of religion and belief and the rule of law. I hope he will continue to do so."
Church Leaders in Jerusalem say they are wary that the bill will return once more and are determined to work with Prime Minister Netanyahu and Minister Hanegbi to find a lasting solution.