Plans which would have let ministers order inquests to be held in private on security grounds have been dropped from the Counter-Terrorism Bill.
The clause would have allowed ministers to remove juries, relatives and the public, from hearings.
The change was intended to stop sensitive information, such as details of phone-taps, becoming known.
The Home Office said the plans had not been completely dropped and would be in a "forthcoming" coroners' bill.
A Ministry of Justice spokesman said they would be "working urgently to consider what changes, if any, are required to the clauses before they are brought forward again in coroners' legislation".
De Menezes case
Opposition parties say it is the second government climb down on the Counter-Terrorism Bill - on Monday ministers dropped the controversial proposal to detain terrorist suspects for up to 42 days before charge.
Ministers had argued that the inquest powers would be used selectively and that the majority of inquests would still have taken place in public.
But security minister Lord West has written to his counterparts on the opposition benches to say that the government will vote with them to remove the clause from the bill.
The plans would also have allowed the home secretary to replace coroners with their own appointees as well as preventing a jury from being called for "reasons of national security".
But opposition parties and civil liberties campaigners said the reforms would set a dangerous precedent and pointed out it was not restricted to terrorist cases.
Parliament's Joint Committee on Human Rights had warned it could affect cases like that of Jean Charles de Menezes, shot dead in London by police who mistook him for a terrorist or of British servicemen killed by US forces in Iraq.
7 July bombings
And some relatives of those who died in the 7 July bombings in London had said they were worried about the measures - they wanted to use the inquests to ask what the police and MI5 knew about the bombers before the attacks.
Pressure group Inquest welcomed the decision to drop the plans saying the measure had been put forward without consultation and would have reduced public scrutiny of the legal system.
John Wadham, chairman of the Forum, a body which aims to prevent deaths in custody, said it was right the issue of sensitive material in coroners' courts should be debated in a wider coroners bill.
He added: "Many members felt these measures could inhibit the learning and sharing of lessons which might help to prevent future deaths."
Shadow home secretary Dominic Grieve welcomed the move. He added: "The Counter-Terrorism Bill was no place for debating this extremely controversial measure, which should be in the Coroners Bill.
"It is vital that the independence and transparency of the coroners system is maintained - not undermined."
For the Liberal Democrats, Chris Huhne also said changes to the coroners' courts should be in a separate bill.
"This second climb down in two days is long overdue. I am delighted that ministers have recognised that they were on a hiding to nothing with these extraordinary clauses, and have now ditched them," he said.
"It would have been far too convenient for the government to be able to hide a proper and independent inquiry into cases like the death of Jean Charles de Menezes or Dr David Kelly."
Coroners must call an inquest into violent, unnatural or unexplained deaths in their districts.
They are held in public and a jury must be convened if the death occurred in controversial circumstances, particularly where it involves the police or other agents of the state.
Moves to change the law may have been prompted by the threat of a legal challenge over the case of a man shot dead by police.
Azelle Rodney, 24, was in a car under police surveillance when it was stopped by armed officers in London on 30 April, 2005, but the inquest into his death has not gone ahead because some secret evidence cannot be made public.