In a letter obtained by The Associated Press, Attorney General Eric Holder says the Food and Drug Administration will go back to the drawing board and propose new labels.
The government had until Monday to ask for a U.S. Supreme Court review.
A judge ruled last year that the requirement violated First Amendment free speech protections. An appeals court upheld that ruling.
Some of the largest tobacco companies sued to block the mandate to include warnings depicting the dangers of smoking and encouraging smokers to quit. They argued the warnings amounted to anti-smoking advocacy. The government argued the photos of dead and diseased smokers were factual.