The government had proposed processing asylum-seekers in remote Pacific island camps, and pushed legislation through parliament's lower house last week.
However, Mr Howard said it was clear the Senate would vote against the draft and he announced he was withdrawing the Migration Amendments Bill rather than face an embarrassing defeat.
The legislation sought to tighten immigration laws so that asylum-seekers who arrived in mainland Australia by boat would be sent to detention centres in the island state of Nauru and on Manus Island in Papua New Guinea while their claims were processed.
If it had become law, even those found to be genuine refugees could have been refused asylum in Australia and sent instead to other countries.
Mr Howard said the asylum-seekers who arrived on outlying islands or were intercepted at sea would continue to be processed on Nauru, as was permitted under current laws.
Opponents fears
Opponents of the bill feared it would see asylum-seekers, including women and children, kept behind razor wire in remote camps with limited access to legal advice.
The bill was also seen by many as a way to appease Indonesia and an effort to discourage further Papuan separatists from heading to Australia for asylum.
Human Rights Watch, a leading human rights group said the law would have created the refugees' equivalent of Guantanamo Bay and accused the Howard's government of trying to shirk its international obligations.
Victory
Labor welcomed the dumping of tough immigration laws as a victory for Australian sovereignty.
Labor immigration spokesman Tony Burke said it was a mistake for Australia to craft domestic laws with the aim of appeasing another country, namely Indonesia.
Mr Burke said Labor would continue work to shut down detention centres on Nauru and Manus island and have all refugees processed on Australian soil.