Dominique de Villepin, the prime minister, said in a televised statement on Monday that he regretted that events had indicated that the First Employment Contract (CPE) could not be applied.
An earlier statement from the office of Jacques Chirac, the president, said: "The president of the republic has decided to replace Article 8 of the law on equal opportunities with measures in favour of the professional insertion of young people in difficulty."
The series of new measures is designed to bring an end to the political emergency that has engulfed de Villepin and the ruling UMP party.
The CPE was put forward by the prime minister as a way of reducing France's youth unemployment from 22.8%.
However, union and student leaders say it will create a generation of "throwaway workers" because it makes it easier to dismiss young employees in a trial two-year period.
Protests and strikes across France in recent weeks drew millions to the streets and brought cities including Paris to a standstill.
Chirac and de Villepin were careful in their statements to say the CPE was being "replaced". Others said it was dead.
Julie Coudry, president of the student confederation, said on LCI television, "The players in the crisis have difficulty pronouncing the words repeal. The CPE is dead, the CPE seems to be finished ... and I think they must have the courage finally to say it clearly."
The prime minister had staked his political reputation on the law and met Chirac and other senior members of the UMP on Monday.
Protests brought the country
to a standstill
The talks aimed to find a solution after days of intense negotiations with union leaders and students.
The protests and a perception that de Villepin has been unresponsive to voter sentiment on the contract have damaged the popularity of the prime minister and his hopes of becoming the ruling party's candidate for presidential elections in 2007.Newspapers on Monday said any changes would probably include subsidising employers to hire young people with the intention of giving the worst-off access to the labour market.
The most disadvantaged young people are those aged 18 to 25 who have left school without qualifications and who are unemployed.
De Villepin made no reference to his political future during his statement.