Downing Street indicated that a motion to exempt Parliament from key parts of the Freedom of Information Act will not now be tabled tomorrow.
Speaking at Prime Minister's Questions, Gordon Brown hit out at the Tories for withdrawing their support from the controversial move.
"We thought we had agreement on the Freedom of Information Act as part of this wider package," he said.
"Recently that support that we believed we had from the main opposition party was withdrawn.
"So on this particular matter, I believe all-party support is important and we will continue to consult on that matter."
The turnaround came little more than an hour after the Prime Minister's spokesman reiterated the Government's intention to order Labour MPs to back the move - rather than give them a free vote.
Other votes on reforming the much-criticised allowances system and tightening audit procedures will still go ahead.
Leader of the House Harriet Harman slipped out a surprise bid to sidestep disclosure last week while attention was focused on the furore over expanding Heathrow airport.
The proposals were backdated to 2005, meaning they would have nullified rulings from the High Court and Information Tribunal that the public had a right to know exactly how MPs were using allowances for second homes.
In return, expenses would have been published under more categories than before - but still not fully itemised.
There has been speculation that the scheme emerged as a result of heavy lobbying from some Labour MPs who would be deeply embarrassed if details of their spending were made public.
The Commons authorities have spent some £1m since May scanning and redacting around a million receipts ready for publication - on top of the £150,000 bill for their failed legal battle.
Ms Harman issued a statement confirming that the motion was being dropped.
"As Leader of the House, I will seek further discussions on how to proceed," she said.
"In view of the lack of cross-party agreement, I can confirm that we will not proceed with the motion on FOI in the debate tomorrow."
She added: "I tabled the motion relating to FOI because it would provide a legal underpinning for a package of changes which would achieve greater transparency in the publication of what MPs spend."
Ms Harman said the motions on revising the Green Book, which sets out rules for MPs' expenses, and tightening audit procedures, would still be debated.
She went on: "I first discussed the proposed package of changes, including the FOI amendment, at a meeting with the Members Estimate Committee on December 15.
"There were further discussions with them earlier this month, and we will need to continue the discussions."
Sources close to Mr Cameron had originally indicated he was likely to instruct his MPs to abstain over the exemption.
However, the party confirmed last night that its members would be ordered to vote against the proposals on the grounds that they limited "transparency".
The Government was also facing the prospect of a rebellion from its own backbenchers, and significant opposition among peers.
A Lords Committee hit out at ministers this morning for trying to "rush through" the plans, and not being clear over why they were necessary.
Liberal Democrat Leader Nick Clegg said: "This is a humiliating climbdown for Gordon Brown after he was forced to accept that people will not tolerate MPs continuing to act like members of a secret society.
"It is also a victory for everyone who think that politicians should be open and accountable to the people who pay their wages."
A spokeswoman for Mr Cameron insisted there had been "absolutely no deal" over the exemption.
The leadership decided to oppose the move as soon as it became clear that did not mean scuppering the wider reform package, she said.
"David Cameron and the shadow cabinet and the Conservative Party has done absolutely no deals with the Government over this.
"They are trying to defend their decision to try to exempt MPs from the Freedom of Information Act by claiming there was some kind of bogus deal. There was not."
Maurice Frankel, director of the Campaign for Freedom of Information, welcomed the climbdown.
But he warned that similar plans could resurface in the near future.
"We are delighted that this proposal has been shelved," he said. "It was wrong in principle for MPs to try and conceal their expenses claims when all other public servants have to release theirs.
"It was improper for the Government to try and rush the measure through without the public noticing or having time to object.
"MPs should not be legislating on the quiet to remove an existing right of access to information about their own expenses in the hope that no-one will notice."
Mr Frankel went on: "Some MPs are clearly desperate to prevent the release of past expenses claims which are likely to have exceeded what could reasonably be justified to the public."
Matthew Elliott, chief executive of the TaxPayers' Alliance, said the Government should never have sought the exemption.
"The public have a right to see how their money is spent by their elected representatives, and it was wrong of anyone to try to stand in the way of that.
"This is a victory for accountability, democracy and taxpayers' rights."
Peter Facey, director of campaigning group Unlock Democracy, hailed a victory for "people power".
"We are delighted that the Government has finally seen sense and backed down on this measure," he said.
"If passed, this Order would have had a catastrophic impact on the reputation of Parliament.
"We now call on the Parliamentary authorities to publish MPs' expenses at the earliest opportunity.
"Fundamentally, the Government backed down because they knew they would lose even they won the vote. This was a clear victory of people power."
Labour MP John Mann (Bassetlaw) said he had spoken to a large number of MPs who were planning to oppose the move.
"It is therefore an excellent win for younger and more modern MPs that the Government has withdrawn the motion that would have exempted MPs from Freedom of Information Claims," he added.
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