The move would have granted the federal government the power to bypass state and territory governments and provide funding directly to local councils.
Prime Minister Kevin Rudd says in calling the federal election for September 7, he was unable to move the local government referendum to a week earlier, given that it was scheduled for September 14.
The decision to postpone the referendum has been welcomed by the federal opposition, but has been criticised by local councils as a missed opportunity to push ahead with urgent constitutional reform.
The referendum had orginally been proposed under former Prime Minister Julia Gillard's leadership earlier this year.
A bill to hold the referendum was passed by federal parliament on June 24.
But electoral and constitutional laws meant the earliest it could be held alongside a federal election was September 14, the polling day set by Ms Gillard before she lost the Labor leadership to Mr Rudd.
Federal Opposition Leader Tony Abbott initially backed the referendum plan, but he subsequently encouraged people to vote "no" if they didn't understand the changes.
Mr Rudd believes the coalition is therefore to blame for the referendum having to be postponed.
"I look with some sadness at the fact that the opposition has withdrawn effectively bipartisan support for that referendum and therefore regretably, it can't proceed because it cannot be held earlier than the 14th. I've been a long term supporter of constitutional recognition for local government, but I think we're going to have to look at that in the next term."
When the referendum plan was voted on in parliament, six coalition senators voted against it, despite it having the support of Opposition Leader Tony Abbott.
Two coalition MPs also voted against the plan in the House of Representatives.
Mr Abbott says he believes the government has itself to blame for the failure of the referendum plan because it mishandled the campaign.
He is particularly critical of the government's decision to allocate the "yes" case about 10 million dollars for its campaign and the "no" case 500 thousand dollars.
"The funding arrangement that this government put in place was grotesquely one-sided. The government hadn't done the spade-work (preparation) with the state governments to ensure they were supportive of the change. That's no way to change the constitution and I've always said that if you're not sure 'Vote No!'. So I think it's probably good that because of the time constraints, this particular referendum is not going to go ahead."
Federal Local Government Minister Catherine King says a re-elected Labor government would work towards a new date giving voters more time to consider the referendum plan.
Labor argued the funding discrepancy between the two campaigns was justified because it reflected the overwhelming support for the referendum plan when it was voted on in the House of Representatives.
The Australian Local Government Association says the postponement of the referendum is a disappointing setback for local councils and communities across the country.
The association's President Felicity-Ann Lewis says a lot of effort had already been put into campaigning for the referendum and she hopes this will not be wasted and that the major political parties put the issue back onto the agenda in the near future.
"So that when we get a date and we can lock in whoever forms government, we will be ready on a date we will be ready to go again to ensure that our communities get the surety that they deserve around their councils being able to receive federal funding directly from the federal government."
A lobby group which opposed the referendum believes the proposed change should not be put forward to the people again unless it has the clear support of both the major political parties.
A spokesman for the Citizens No Campaign, Julian Leeser, says most state governments were opposed to the change and so were a number of state Liberal and National party branches.
"The referendum should never have been put forward in the first place. If you read the Spigelman inquiry which was the independent inquiry that was set up to consider whether this referendum was necessary, they said there was no put putting the referendum forward unless there was bipartisan support and the support of all the states. A number of Liberal Party state divisions passed very strong, unanimous resolutions against this referendum and every state government in the country, except South Australia, was not supporting the referendum."
