Arizona Governor Jan Brewer has vetoed a Republican bill that would have allowed businesses to refuse to serve gay people on the grounds of religious beliefs.
Loud cheers erupted outside the Capitol building immediately after Brewer made her announcement.
"My agenda is to sign into law legislation that advances Arizona," Brewer said at a news conference. "I call them like I seem them despite the tears or the boos from the crowd. After weighing all the arguments, I have vetoed Senate Bill 1062 moments ago."
The governor said she gave the legislation careful deliberation in talking to her lawyers, citizens and lawmakers on both sides of the debate.
But Brewer said the bill "could divide Arizona in ways we could not even imagine and no one would ever want." The bill was broadly worded and could result in unintended negative consequences, she added.
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The bill backed by Republicans in the Legislature was designed to give added protection from lawsuits to people who assert their religious beliefs in refusing service to gays. But opponents called it an open attack on gays that invited discrimination.
Prominent Phoenix business groups said it would be another black eye for the state that saw a national backlash over its 2010 immigration-crackdown law, and warned that businesses looking to expand into the state may not do so if bill became law.
Companies such as Apple and American Airlines and politicians including former Republican presidential nominee John McCain were among those who urged Brewer to veto the legislation.
The bill allows people to claim their religious beliefs as a defence against claims of discrimination. Backers cite a New Mexico Supreme Court decision that allowed a gay couple to sue a photographer who refused to document their wedding.
Democrats said it was a veiled attempt to legally discriminate against gay people and could allow people to break nearly any law and cite religious freedom as a defence.
The push in Arizona comes as an increasing number of conservative states grapple with ways to counter the growing legality of gay marriage. Arizona's voters approved a ban on gay marriage as a state constitutional amendment in 2008. It is one of 29 states with such constitutional prohibitions, according to the National Conference of State Legislatures.
Federal judges have recently struck down those bans in Utah, Oklahoma and Virginia, but those decisions are under appeal.
