The referendum on a draft constitution would go ahead as planned on December 15. President Mursi's dramatic U-turn came after a meeting he held with other political leaders.
"The constitutional decree is annulled from this moment," said Mohamed Salim El Awa, a former presidential candidate, who yesterday read a televised statement from a legal committee empaneled to review Mursi's action last month.
The present political turmoil began after President Mursi granted himself absolute powers through the November 22 decree that had put his decisions beyond judicial review, a move which gained him titles like "dictator" and "Pharaoh".
Tens of thousands of people took to the streets across the country opposing the decree and the referendum.
Salim, however, said the referendum on a new constitution would go ahead because it was not legally possible for the president to postpone it.
In his speech on Thursday, President Mursi was reluctant to give up the absolute powers he granted through the decree.
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Earlier, military had warned of "disastrous consequences" if the political crisis gripping the country was not resolved through dialogue.
"The Armed Forces watches with sorrow and concern the developments of the current circumstances, and the status of the divisions and unfortunate events threatening the pillars of the Egyptian state and the national security," a military statement said.
The statement urged all political forces to pursue dialogue. It also said the loyalty of the armed forces is for the people. "The military institution always sides with the great people of Egypt, and is keen on their unity," it said.
The military statement came as demonstrators fenced off an administrative building in Tahrir Square angry over Mursi's attempts to push through a new constitution.