Reformist MPs had passed an emergency bill limiting the power of the Guardian Council, a conservative watchdog, to screen candidates for public office after the body disqualified thousands from standing in the 20 February parliament elections.
But the council, which vets all legislation, vetoed the electoral reform bill on the grounds that it contained points contrary to Islam and the constitution.
In Tuesday's parliament session, which was carried live on state radio, prominent reformist MP Mohsen Mirdamadi said the legislation should be ditched, arguing that pursuing it further would be futile.
"We are used to the Guardian Council finding faults in our bills. But there are no flaws," he told the Majlis, accusing the council of simply trying to "crush the bill".
Mirdamadi (R) argued in favour of
ditching the reform plan
According to Iran's constitution, the parliament can make amendments to legislation and send it back to the Guardian Council for a second examination.
But lawmakers in the 290-seat chamber agreed with Mirdamadi when he said "why waste our time to make corrections"?
He also said that the Expediency Council - another overseeing body designed to resolve disputes between parliament and the Guardian Council - was likely to remain true to form and side against the reformers.
"Sending it to the Expediency Council would not solve any problem either, so therefore abandoning it is the best choice," Mirdamadi said, as deputies voted to shelve the legislation for six months.
The crisis erupted after the Guardian Council blacklisted 3605 of 8157 prospective poll candidates.
Khatami rejects resignations
President Muhammad Khatami has turned down the resignation offers of top lawmakers who threatened to quit over the disqualification of candidates, newspapers reported on Tuesday.
Khatami has urged the reformists
to remain calm
"Of course we will insist on the need to hold a free and fair election as the symbol of democracy and make sure the process leads to a fair result," Khatami said in a letter to the officials, the newspapers said.
"Safeguarding the Islamic revolution led by the late Imam (Ruhollah) Khomeini is the responsibility of all those who care for Islam and Iran," he said in the letter.
Khatami put his trust in the Guardian Council following the
advice given by Supreme Leader Ayat Allah Ali Khamenei, who has urged the council to revise the candidate bans.
"I hope the guidelines of the Supreme Leader will be fully respected to allow the holding of a free and fair election which, God willing, will help boost the prestige of the Islamic Republic," he said.