The controversial bill would have reversed a court ruling forcing PM Silvio Berlusconi's company to sell off one of its three TV stations.
Carlo Azeglio Ciampi told parliament to re-examine a bill passed earlier in December, apparently heeding public criticism.
Opponents of the law have said it erodes media freedom, although the government claims it would provide greater choice.
The bill was passed on 3 December by the upper house of parliament after being approved in October by the lower house, or Chamber of Deputies.
Under Italian law, parliament can vote on the bill again without making any changes. Ciampi would be obliged to sign the bill if it passed a second time.
Berlusconi has recently suffered a flurry of political
setbacks, including the weekend collapse of European Union
constitutional talks that he chaired.
But Ciampi's decision strikes Italy's richest man in his wallet.
"It's a significant setback and it has certainly angered
Berlusconi," said Franco Pavoncello, a professor of political
science at John Cabot University in Rome.
The Berlusconi family's broadcaster Mediaset was one of the biggest losers on the Milan stock market on Tuesday, down 2.5% at 9.70 euros at 12:00 GMT.
Influencing an estimated 95% of Italian TV through his political office and his business interests, the PM appeared nonchalant at the decision, though one unnamed political source said Berlusconi was 'livid'.
The president's move - the first time he has refused to sign a bill for anything other than budget reasons - came after he met Berlusconi earlier in the day.
Berlusconi has interests in over
half a dozen channels and papers
However, the PM said he was happy to have parliament consider "intelligent" changes to the bill.
The proposed law contains a number of different provisions - including the creation of multi-channel digital broadcasting.
It also lifts the ban on cross-ownership of broadcast and print media in 2009 and increases the amount of advertising any one single company can have.
The bill also proposes lifting a previous restriction on one person owning more than two national broadcasting stations – something very much in the PM's interest.
As Italy's richest man, Berlusconi owns three Mediaset channels - Italia 1, Rete 4 and Canale 5 and holds political influence at the board of state broadcaster Rai.
He also has press interests at the Panorama and Il Giornale papers, publishing interests at Mondadori publishing house and cinema rights.