In a written statement to Parliament today, culture secretary Andy Burnham said the plan to divert funds for the digital switchover, first touted last year, had effectively been supplanted by calls for "more wide-ranging" proposals on Channel 4's future funding model.
"In the period since the notification was made, the debate on the future of public service broadcasting in the UK has moved on significantly," said Burnham.
"Furthermore, the structural challenges that traditional commercially funded public service broadcasters face have been exacerbated by current cyclical conditions.
"The Government has, therefore, brought forward its timeline for decisions and is now committed to take a more comprehensive view on the future institutional and financial framework of public service broadcasting, including the future of Channel 4, early in 2009."
The proposal has been the subject of investigation by the European Commission since June, with many anticipating it could fall foul of EC state aid rules, aimed at preventing unfair competition.
The decision to shelve plans to top slice the licence fee follows Channel 4 warning it faces a £150m shortfall by the time of switchover in 2012, claims largely supported by broadcasting regulator Ofcom in September.
A Channel 4 spokesman said: "Channel 4 supports the decision to withdraw this proposal. As the Government makes clear in its statement, broader decisions about the future framework of public service broadcasting will be made early in 2009 as part of its Digital Britain review.
"In light of the Government's accelerated timetable, it makes sense to seek any necessary approvals from the commission for a single, all-encompassing solution to support the UK's public service broadcasting system, rather than a series of small-scale proposals."