Kwasi Kwarteng has dramatically abandoned plans to scrap the 45p rate of income tax in a major U-turn for Liz Truss's Government.
The Chancellor said this morning that to go ahead with the move would have been a "distraction".
It comes just hours before he makes a make-or-break speech to the Conservative Party conference in Birmingham about his economic policy.
As late as last night, the Treasury said he was going to use the occasion to say he was going to "stay the course" and stick to all the plans outlined in last month's controversial mini-Budget.
But this morning, Mr Kwarteng said on Twitter: "It is clear that the abolition of the 45p tax rate has become a distraction from our overriding mission to tackle the challenges facing our country.
"As a result, I am announcing we are not proceeding with the abolition of the 45p tax rate. We get it, and we have listened."
It follows a growing rebellion among Tory MPs against the 45p plans, led by Michael Gove, the former levelling up secretary.
Mr Gove signalled on Sunday that he would not vote to scrap the 45p rate, saying it displayed the "wrong values" and that Ms Truss did not have a mandate for the move.
He said he was "profoundly concerned" about the decision to borrow to fund tax cuts, calling it "not Conservative".
Ms Truss said that cutting the 45p rate of tax was not discussed at Cabinet and that the decision to include it in the mini-Budget had been taken by Mr Kwarteng.
Backbench rebels had stepped up their campaign to force the Prime Minister into an about turn over the mini-Budget. More than 13 MPs publicly criticised the 45p tax cut policy.
On Sunday night, a leading rebel said as many as 70 Tory MPs were considering voting against the move - and that they were pushing Ms Truss to delay the scrapping of the 45p rate for a year.
It had been expected that MPs would vote on the decision as early as next week.
Andy Street, the Tory mayor of the West Midlands, also came out against the 45p tax cut, saying: "I think the lesson of history is, if you look at Thatcher and Reagan, you have to carry the huge majority of people with you, and that’s proving a difficult thing to do."
George Osborne, the former chancellor, said that it is "touch and go" whether Mr Kwarteng could survive in his job.
He told the Andrew Neil Show on Channel 4 that "ruthless prime ministers will throw their chancellors under a bus". He said that if Mr Kwarteng’s speech on Monday goes badly, "it’s curtains".
One Tory MP described the tax cut as "mad politics" and predicted that the rebels would be able to recruit the 36 MPs needed to overturn the Government's working majority.
The same MP said members of the Cabinet were "unhappy" about the policy and "angry" they were not consulted. The parliamentarian also said that junior members of the Government were prepared to resign if the tax cut was not scrapped.
The rebels had discussed voting with Labour if Sir Keir Starmer tabled an opposition day motion or an emergency debate on reversing the tax cut.
Meanwhile, Ms Truss admitted for the first time on Sunday that the mini-Budget could have been communicated better.
"I do stand by the package we announced and I stand by the fact we announced it quickly, because we had to act," she told the BBC’s Laura Kuenssberg on Sunday.
"But I do accept we should have laid the ground better. I have learned from that, and I will make sure that in future we do a better job of laying the ground."
The Chancellor also admitted at the weekend that he lost sleep over the market reaction to his mini-Budget.
He told the Mail on Sunday: "It’s very difficult to actually anticipate how markets react to anything, and if politicians were really good at reading markets, I suggest they probably would be market traders.
"One of the things that really ruined my sleep is the markets. That sort of thing is trying. I’ve had difficult times reacting to what’s happening but you know, I am very confident that this is the right thing to do, and I am a really, really great believer in Britain."
Mr Gove called on Sunday for the 45p tax rate to be reinstated because Ms Truss does not have an electoral mandate for it.
Speaking to Chopper’s Politics Live podcast, he said: "What was not discussed during the leadership election is income tax cuts for the very wealthiest.
"I think that it is difficult to argue that if you are prioritising tax cuts that the people who should be the first recipients of the biggest tax cuts should be the wealthiest in our society.
"The majority Boris won was a One Nation majority.
"People wanted levelling up, a Conservative government that was dedicated to improving the lives of those who weren’t amongst the wealthiest in our society and we’ve got to stay true to that tradition."
He said the scale of borrowing outlined by Truss "was a contributory factor to some of the turbulence" seen in the markets. "My worry is we are betting too much on tax cuts when we are borrowing to pay for them."
The Government is lining up a raft of announcements this month on regulatory reforms to financial services, childcare, immigration, housing, business, energy, mobile broadband and agriculture, which Ms Truss hopes will calm the markets.
The Chancellor will also pledge an "iron-clad commitment to fiscal discipline" on Monday. He will insist his growth plan is vital to avoid "slow, managed decline" – adding that he would never accept it is Britain’s destiny to become a middle-income country.