"With the talks that we had with the president, it was decided to postpone it until further notice," he said.
The government proposed to bring in the VAT at a rate of three per cent. Traders argue that the effective rate would be higher because the levy was to be imposed at every stage of the supply chain, from producer to consumer.
The vast Tehran market, whose corridors stretch for several kilometres, shut entirely on Sunday, a normal trading day, in the biggest such protest since the 1979 Islamic revolution.
According to Qasem Nodeh Farahani, a member of the guilds' council representing the merchants, the government and the commerce ministry agreed that the tax should be suspended indefinitely.
Rises in retail prices have accelerated since Ahmadinejad took office in 2005.
In September, the cost of a basket of 45 staple food items was up 50 per cent on a year earlier, news reports said.
Annual inflation topped 29 per cent in the Iranian calendar month that ended on September 21.
"Because of this tax, there is an increase of 10 to 15 per cent in prices, so we want the government to annul the law," a shopkeeper said on Sunday.
Iran's "bazaaris" play an important political as well as economic role. The merchants contributed to the collapse of the shah's government during the 1979 Islamic revolution when they went on long strikes.
Saeed Leylaz, an economist, told the AFP news agency: "Inflation of around 30 per cent has to manifest itself in one way or another. This strike is a sign of the dissatisfaction of the middle class with the economic policies of Ahmadinejad."
Many economists have accused Ahmadinejad of directly fuelling price rises by contributing huge amounts of cash into the economy to fund local infrastructure projects.