The Fifa Congress in Bahrain on Thursday had been due to discuss the Palestinian FA's demand to have six West Bank Jewish football teams suspended from Israel's leagues.
The Palestinians were further demanding that if Israel did not comply, it should be suspended from all international competition.
However, meeting on Tuesday night the Fifa Council decided to withdraw the Palestinian resolution.
A brief statement said, "Following the report by chairman of the Monitoring Committee Israel-Palestine Tokyo Sexwale, the Fifa Council considered that at this stage it is premature for the Fifa Congress to take any decision."
The Palestinian FA was left making frantic, last-minute attempts to put the subject back on the agenda, although such a constitutional option remained unclear. The great fear is that if the issue is ever voted on in the Fifa Congress, where each country has one vote, the built-in international majority opposing Israel's occupation of the West Bank, would win the day.
The past week has seen a frenzy of diplomatic activity including a phone call from Israeli Prime Minister Binyamin Netanyahu to Fifa CEO Gianni Infantino to discuss a way out of the impasse. On Tuesday, Mr Sexwale brought together Israel FA Chairman Ofer Eini and
Palestinian FA Chairman Jibril Rajoub, hoping for a compromise agreement but the meeting broke down in acrimony.
The Palestinians have been encouraged by a Fifa resolution last year not allowing Russian teams in Crimea to play in the Russian League because it is occupied Ukrainian territory.
Mr Sexwale's report proposed that the Israeli teams in Maale Adumim, Ariel, Hebron, Givat Zeev, Oranit and the Jordan Valley be suspended from Israel's league. The Israelis insist that the matter can only be dealt with when Israel and the Palestinians reach an agreement on their borders.
For its part Israel has protested to Fifa that the Palestinian FA is in breach of statutes and disciplinary codes by naming competitions after terrorists.
This year's Fifa Congress had been scheduled for Kuala Lumpur but was switched to Bahrain after the Malaysians refused to issue visas to the Israel delegation.
