Councillors voted overwhelmingly against the bylaw on Wednesday. The controversial ban would have kicked in Jan. 1.
The bylaw to ban the bags had faced opposition from several groups, including environmentalists, retailers and taxpayers' advocates.
An alliance of 15 organizations protested at city hall last month, warning that eliminating the bags would cause job losses in the plastic industry and would not help reduce pollution.
The group said consumers would start using more paper bags, which don't recycle well and consume three times the energy to produce.
A motion banning plastic bags passed in June after council approved a motion to scrap a five-cent levy on the bags. Last month, council voted not to reopen the discussion.
But on Wednesday, council met for about 20 minutes to discuss confidential legal advice from the city's solicitor about the bylaw before voting 38-7 to scrap it.
Council plans to revisit the ban proposal at a later date.
Mayor Rob Ford had spoken out strongly against the ban while the city's solicitor warned it could spark legal action.
Earlier this month, the Ontario Convenience Stores Association began legal action against the city, saying the proposed ban was approved without a proper consultation process.
The group praised council's decision Wednesday, calling it "a good day for small businesses in Toronto."
"By selectively prohibiting merchants from providing certain types of plastic bags, shoppers would have been less likely to make purchases and that would have hit Toronto's small, family-run convenience stores the hardest," said Dave Bryans, who heads the association.
(AM640, 680News, The Canadian Press)
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