The Christian Council of Korea (CCK) had intended to install the structure in a military-controlled border area and light it up on December 23, in a move certain to infuriate Pyongyang.
The plan had been approved by South Korean military authorities, who took down an old 60 feet (20 metre) tower in Gimpo -- west of Seoul -- in August.
"The establishment of our Christmas tree (tower) was to be a religious event aimed at promoting peace," Hong Jae-Chul, a senior CCK official, told reporters.
The decision not to proceed with the tower comes as cross-border tensions run high following a series of minor border skirmishes in recent months.
More From This Section
The old tower was topped with a giant cross during the Christmas season. The atheist North viewed the light show as a provocative display of psychological warfare, and threatened to shell the tower unless it was removed.
The South's defence ministry dismantled it, but said it was because the 43-year-old structure was unstable and dangerous.
Last month, North Korea warned of the "catastrophic impact" of any effort to rebuild the dismantled structure, while local residents in Gimpo expressed fears of a North Korean artillery attack.