Justice Secretary Jack Straw bowed to public pressure and scrapped the proposals, which would have allowed medical records and DNA to be shared with police, foreign governments and other bodies.
Straw had argued that it would mean bereaved families would not have to speak to different departments and agencies many times over when a relative died.
However the Liberal Democrats said that data sharing would not be restricted to public bodies and people's information could have been given to private companies in any country.
The data sharing plan sparked a backlash from politicians, doctors, lawyers and civil liberties campaigners who warned it was the latest step towards a Big Brother society.
Shadow justice secretary Dominic Grieve welcomed Straw's change of heart as a "belated u-turn on proposals for unlimited data sharing across government".
Justice minister Michael Wills said that it was not a u-turn but the "proper process of parliamentary scrutiny".
Shami Chakrabati, director of civil liberties campaign group Liberty, told the Daily Mail: "The infamous Clause 152 was a hugely arrogant proposal that would have allowed vast quantities of personal information to be passed all over the public and private sectors on a ministerial whim."
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