The intelligence and counter-intelligence law was approved in the end of May but is now temporarily declared null and will be modified to correct "some mistakes".
"I have no problem acknowledging it, so I decided this morning to correct that law," Chavez said.
Criticism
The law had sparked outrage among opposition members and human rights groups.
Marino Alvarado of the Venezuelan Programme for Education and Action on Human Rights (Provea) said the law "amounts to what is known as a police state".
Chavez specially cited problems with the regulation requiring co-operation from any person or business, whether domestic or foreign, with intelligence services.
"This is a mistake and not a small one," Chavez said.
"I cannot force someone when an intelligence unit asks for co-operation, to become an informant, and then if they refuse we put them in jail."
While not immediately signalling when an amendment would take place, Chavez promised to "rewrite the law listening to the criticism".
Ramon Rodriguez, Venezuela's interior minister, said the law would help Venezuela stand up to "things like the US interference in [Venezuela] internal affairs".
For Chavez, "the law was not bad but it has some elements that the adversary uses to generate fear".
"The battle is political, not legal.