The decision by the board of Eskom would not undermine "national security of supply" as economic growth would slow and other plants were being built, the government communications office said.
Groups led by Areva, the world's top supplier of nuclear reactors, and Toshiba's Westinghouse Electric are vying for the order. A global recession and an expected drop in energy demand is halting spending on projects from Canada to the Middle East and Africa.
"It's too big, we can't do it," said Eskom spokesperson Fani Zulu. "The bidders were informed after we took the decision at a board meeting."
Eskom is looking to borrow about R150 billion and is in talks with the World Bank for a loan of $5 billion (R51 billion).
Its credit rating was cut by Moody's Investors Services this year after regulators allowed a 27 percent rise in electricity prices rather than 61 percent.
"We're disappointed because we put a lot of work into the process, but we're hopeful the South African government will remain committed to developing nuclear power," said Jacques-Emmanuel Saulnier, a spokesperson for Areva in Paris. "If South Africa comes back to us, we'll be there."
Eskom has not kept pace with local electricity demand and has restricted supply to firms including Anglo American and Xstrata.
The economy would probably grow at a slower pace than forecast by Eskom in the next five years, reducing power needs, said economist Jac Laubscher of Sanlam. "It's not a train smash that they've cancelled the nuclear plan."
The global recession and rising interest rates have reduced government projections, with the economy now expected to expand 3 percent next year and 4 percent in 2010.
The plan was also cancelled to ensure that Eskom's ability to provide competitively priced energy was not jeopardised, the government said.
South Africa had planned to generate 20 000 megawatts from nuclear reactors by 2025, more than 10 times the current output. Power demand has risen by 50 percent since 1994, while government indecision postponed Eskom's expansion.
The reasons for the pause were specific to South Africa, and did not reflect the general state in the nuclear industry, as shown by efforts by utilities in the UK and the U.S. to build nuclear power plants, Areva's Saulnier said.
Areva proposed two 1 650MW reactors, while Westinghouse offered to build three 1 140MW reactors.
Local construction groups Aveng and Murray & Roberts formed part of the groups bidding for the contract.
Westinghouse spokesperson Janine Claber was not immediately available to comment on the decision.
Electricite de France, the world's top operator of atomic reactors, has South Africa among its priorities for nuclear expansion.
South Africa remained "committed to nuclear power" to lessen the nation's carbon footprint, Portia Molefe, the department of public enterprises director-general, said.