The broadcaster said it has been forced into reviewing the project because media regulator Ofcom has not yet completed its regulatory review of pay-TV, and it has launched a period of consultation with the venture's 28 employees.
However, a Sky spokesman said the firm is looking to redeploy as many staff as possible elsewhere in the company.
Picnic's suspension has also brought a halt to Sky's search for potential marketing and media agencies to handle the brand's consumer launch.
Sky insists that plans to eventually launch Picnic, which would enable viewers with non-Sky Digital set-top boxes to pay for premium content, have not been dropped permanently.
The company expressed frustration at the fact that Ofcom has spent 18 months looking at its Picnic proposals and that there still appears to be "no end in sight".
In a statement, the Sky spokesman said: "While regulation works at its own pace, no business can go on like this indefinitely, so we've had to take some pragmatic decisions.
"We will decide whether to reactivate the project when we have regulatory clarity."
The service was expected to launch next year following authorisation by the regulator. However, Ofcom is combining its inquiry into Picnic with an investigation of the pay-TV market and an outcome on both probes may not now be delivered until next year.
Ofcom responded that BSkyB had itself been late with its submissions and approach to the inquiry.
The Picnic service would have replaced Sky Three, Sky News and Sky Sports News on Freeview with Sky Sports 1, Sky Movies and Sky One.
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