Banda, who has claimed there were "serious irregularities" with the poll, declared fresh elections should be held within 90 days but said she would not stand as a candidate, to "give Malawians a free and fair" election.
But hours after her announcement, Malawi's high court issued an injunction preventing the president from annulling the poll.
The injunction was granted after a lawyer for the Malawi Electoral Commission applied to the court to quash Banda's decision, asking whether she had any "mandate, constitutional or statutory to interfere with electoral process."
Banda's main rival Peter Mutharika said the decision to annul the election was "illegal".
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"Nothing in the constitution gives the president powers to cancel an election," said Mutharika, who partial results showed was well ahead of Banda in the polls. "This is clearly illegal, unconstitutional and not acceptable."
There were chaotic scenes at the tally centre in Blantyre when word went around that the poll had been nullified, with police ordering a shutdown of the centre.
European Union election observers urged "political parties, supporters and other stakeholders to remain calm" and allow the electoral commission "to finalise its task on tabulation and announcement of results."
Her supporters have alleged that Mutharika -- who is already facing pre-election treason charges -- may be behind the irregularities.
With about a third of the votes counted Mutharika, 74, had 42 per cent of the vote, while Banda has 23 per cent, according to preliminary results announced by the electoral commission late yesterday.
Mutharika is the brother of late president Bingu wa Mutharika, who died in office two years ago.