The planned sculpture would see a wide slit entitled "Memory Wound" cut into a strip of land facing the island of Utoya where most of Breivik's 77 victims were killed.
"We wish to avoid a painful lawsuit, which would be very burdensome on a lot of people," Norway's minister of local government, Jan Tore Sanner, said today.
"We are willing to find a different memorial than the one initially planned," he told Norwegian radio NRK.
But the announcement failed to satisfy locals, who sued the state in June to block the construction, arguing it was illegal to construct something that would cause harm to the local community and landscape.
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The small Utoya island, located in the Tyrifjorden lake, was the scene of Breivik's gun rampage on July 22, 2011. He spent more than an hour shooting at hundreds of people gathered for a summer camp organised by the Labour Party's youth wing, killing 69 of them.
Just before that, the right-wing extremist had set off a bomb in a van parked at the foot of the government offices in Oslo, killing eight other people.
Locals have insisted that the memorial would be a constant reminder of the tragedy to those who live nearby, and lead to an unwelcome increase in visits to the area.
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