The retreat was hailed by those opposed to the son of the former president as the latest sign that he may be less prepared for the cut and thrust of national politics than his soaring poll ratings suggest.
A short announcement from Mr Bush's communications director, Karen Hughes, late on Monday heralded the U-turn. "Governor George W Bush," it began, "today directed his presidential campaign to send a campaign cheque to the Iowa Republican Party to cover the costs of renting space and purchasing tickets for the Iowa straw poll. He asked the party to refund individual cheques from six donors that had been sent for that purpose."
Next month's Iowa straw poll, an informal, preliminary part of the campaign process, is seen by the Bush camp as an opportunity for its candidate to cement his supremacy over his Republican rivals.
It was revealed last week that six wealthy (but unidentified) Bush supporters were to fund the renting of space and buying of tickets at the event on his behalf, so allowing him to save his already bulging war-chest for the campaign proper.
His rivals for the nomination had challenged the legality of the private donations, arguing that they ought to be declared as campaign expenses. But the Bush camp insisted that, under Iowa rules, everything was quite legal.
Ms Hughes's statement said the Iowa Republican Party had made clear that individual contributions were allowed, but that Mr Bush had "decided to remove any question or doubt by paying for these expenses directly from his presidential campaign account".
In other words, the Bush campaign belatedly accepted what had been apparent to his rivals right away: that while legally acceptable, the contributions could become a political liability.
The anonymity of the donors was an additional problem, as Mr Bush had already attracted criticism for not identifying the big donors who have boosted his campaign fund to more than $37m. He is now said to have agreed to release the names of those who have made contributions of more than $100,000.
The controversy over who should fund his participation in the Iowa straw poll came at the end of an uneasy fortnight for Mr Bush, who is now out on the campaign trail almost every day. His communications manager, David Beckwith, resigned after only 10 weeks, apparently after differences with Mr Bush and Ms Hughes.
One point of conflict between the two campaign workers was reported to be Mr Beckwith's decision to understate the estimated value of campaign donations so that the real figure, when it was announced, would appear more impressive.
Mr Beckwith's resignation coincided with a public spat over a clause in the deed to a Texas house sold by Mr Bush six years ago, restricting purchase and occupancy to whites. While this was a non-issue - such clauses are null and void in Texas and remain in the deeds of older houses only as a relic of segregation - Mr Bush's testy handling of reporters' questions on the subject betrayed a lack of resilience under fire. With the media such important players in US elections, such short-tempered sensitivity to criticism could be a handicap if, as is likely, the campaign becomes rough.