The programme, adopted after the September 11 attacks, allowed the US government to eavesdrop on US citizens' international phone calls and emails without a warrant.
Democrats and other critics have demanded an independent court to review surveillance warrants during more than a year of debate.
US constitution "violated"
In a letter to congressional leaders, Gonzales said: "The president has determined not to reauthorise the Terrorist Surveillance Program when the current authorisation expires."
A senior justice department official said Bush had reauthorised the programme every 45 days since its inception.
Gonzales said a recent secret-court approval allowed the government to act effectively without the programme.
Critics have said the programme violated the US constitution and a 1978 law, the Foreign Intelligence Surveillance Act, which made it illegal to spy on US citizens in the United States without the approval of the special surveillance court.
Gonzales said a judge on the secret Foreign Intelligence Surveillance Court approved a new government proposal on January 10.
This allowed it to target communications into and out of the United States when probable cause exists that one person is a member of al-Qaeda or an associated terrorist organisation.
The court's judges are charged to provide an independent review of the administration's requests for warrants for eavesdropping.
"Speed and agility"
Gonzalez reiterated the administration's position that the programme has been legal, but said the government will now have the ability to act with sufficient "speed and agility."
Tony Snow , White House spokesman, said the new rules approved by the court addressed administration concerns.
Snow said: "The president will not reauthorize the present programme because the new rules will serve as guideposts."
Gonzales' letter came the day before he was scheduled to appear before the senate judiciary committee, where the Democrats now in power were expected to question him closely about the programme.
Patrick Leahy, the Democrat Vermont senator and the judiciary committee's chairman, welcomed Bush's decision.
Leahy said: "We must engage in all surveillance necessary to prevent acts of terrorism, but we can and should do so in ways that protect the basic rights of all Americans including the right to privacy."
Charles Schumer, the Democrat New York senator and a judiciary committee member, said: "Why it took five years to go to even this secret court is beyond comprehension."