The announcement came as protesters took to the streets for a fifth consecutive day AP.
Prime Minister Sorin Grindeanu said it would be repealed on Sunday.
"I do not want to divide Romania. It can't be divided in two," Mr Grindeanu said in a televised statement.
Tens of thousands of flag-waving protesters in central Bucharest cheered his announcement, which came after five consecutive days of demonstrations.
The protests in the eastern European country against the decree have been the largest since the fall of communism in 1989.
Mr Grindeanu said he "heard and saw many opinions", including from "the voice of the street". He said that parliament will now debate a new corruption law.
He added Justice Minister Florin Iordache would take responsibility for the poor communication and confusion around the controversial measure which would have allowed many officials convicted of corruption to leave prison.
Rallies outside parliament
The decree was meant to come into force at midnight on 10 February.
It would have decriminalised abuse of power offences when sums of less than €44,000 (£38,000; $47,500) are involved.
One immediate beneficiary would have been Liviu Dragnea, who leads the ruling PSD party and faces charges of defrauding the state of €24,000.
The leftist government only returned to power in December after protests forced its last leader from power in October 2015.
Romania's prime minister said on Saturday he was scrapping a decree that would have shielded dozens of politicians from prosecution for corruption, bowing to one of the biggest protests since the fall of dictator Nicolae Ceausescu in 1989.
It would have come into force at the end of next week.
"I do not want to divide Romania. Romania can't be split into two. Right now Romania seems broken in two. My last desire is to witness this," Grindeanu said, referring to the public disgust at the decree which brought hundreds of thousands onto the streets every day since it was passed.
While he made the announcement live on television, some of the anti-corruption protesters outside his office, which police estimated at 170,000, chanted: "Resign! Resign!" and waved the Romanian flag.
Soon after, an image of a map of Romania was laser-projected onto a nearby building, with the words: "We WOKE UP!" Protests in some 70 cities nationwide were estimated by police to number 330,000 people.
"They must go. This is an incompetent government," said one protester who gave his name as Gabriel. "We don't want to see this repeated. We won't give up."