Spain's Constitutional Court decided unanimously last month to hear the central government's case against the poll, which automatically suspended the referendum until it hears arguments and makes a decision - a process that could take years.
The regional government of Catalonia had vowed to press ahead with the vote but during a meeting of pro-referendum parties on Monday it announced that it would not go ahead after all.
"The government has determined that the consultation (referendum) can't take place," Joan Herrera, a lawmaker with the tiny leftist Initiative for Catalonia party, told reporters after the talks.
Catalonia's nationalist government, led by Artur Mas, will announce an alternative proposal on Tuesday, he added.
Mas, who had previously promised to respect the law in his drive for a non-binding vote on whether the wealthy northeastern region should break away, is scheduled to give a press conference on Tuesday at 10am (0800 GMT).
He has hinted that if the central government blocked the independence vote he could call an early regional election that would act as a plebiscite on the issue.
Mas has faced an undertow of fierce separatist yearning in the street and among his political allies.
Members of the left-wing Catalan Republican Left (ERC), which prop up Mas's conservative CiU coalition in the regional assembly, have pressured him to defy the court order.
In a statement released after the news broke that the government had decided to call off the referendum, the ERC said "there is only one path: parliament makes an immediate declaration of independence".
Polls suggest the ERC could make big gains if Mas were to call early elections, leaving Madrid facing a Catalan government more fiercely set on independence.
With an economy roughly the size of Portugal's, Catalonia and its 7.5 million inhabitants - 16 percent of the Spanish population - have long been an engine for the country as a whole.
The region has its own widely spoken language which was repressed during the dictatorship of General Francisco Franco and a distinctive culture which Catalans are proud of.
The 1992 Summer Olympics, in part financed by the national government, helped transform the Catalan capital, Barcelona, into one of Europe's most visited cities.
But a growing number of Catalans resent the redistribution of their taxes to other parts of Spain and believe the region would be better off on its own.
The 2008 real estate crash that triggered a five-year economic downturn across Spain and a 2010 decision by Spain's constitutional court to water down a 2006 statute giving the region more powers have added to the growing pressure for secession.
Catalans have been fired up by last month's independence referendum in Scotland, even though voters there rejected a separation from Britain.
Hundreds of thousands of people formed a giant "V" for "vote" in downtown Barcelona on September 11, Catalonia's national days, to push for the right to hold the referendum
The Catalan National Assembly (ANC), a powerful civil pro-independence group which organised the protest, had already started a campaign of door-to-door canvassing for the referendum.
But an October 5 poll showed only 23% of Catalans supported the idea of forging ahead with the referendum and 45% wanted the regional authorities to comply with the stay ordered by the Constitutional Court.
Prime Minister Mariano Rajoy has called for dialogue with Catalans to resolve the impasse.
"Law and dialogue, this is the way out of this situation," he said at a campaign event for his conservative People's Party on Saturday in Guadalajara just north of the Spanish capital.
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Civilized nations decide their disputes through dialogue and vote, but the mean try to hold on to status-quo even if they have to use the meanest means like mass killings, rapes, cheating, and deception. Which category Indians fit-in? Civilized, or?