Prime Minister John Key has announced the controversial Section 92A law, which has been widely condemned by internet users, is to be delayed.
It will go on hold until March 27 while work is carried out on a voluntary code of practice.
If no solution is reached by then it will be suspended.
If no agreement was reached then the section would be suspended, Mr Key said.
If a code was agreed to, there would be a review after six months to see if the law was working as it was intended.
"Obviously our preference is for the parties to reach a compromise agreement with each other and hopefully the law will work properly," Mr Key said.
"If it doesn't we will change it."
Mr Key said he was advised that the various parties were close to agreement.
The new law was passed by the then Labour government last year. The clause which has sparked protests was removed by a select committee but then restored by the minister responsible for the bill, Judith Tizard, when it returned to the House.
Those promoting the clause say it will effectively police widespread copyright abuse on the internet.
Both National and Labour backed the law, but since then many MPs have had a change of heart.
In response to criticism, Commerce Minister Simon Power last week said a code of practice being developed by the internet community would help implement the law.
Mr Key said both sides of the debate had a point.
InternetNZ Executive Director Keith Davidson says the delay to the law's implementation is a good start, but does not go far enough.
"New Zealanders can breathe a sigh of relief that their internet access is no longer under threat due to unproven allegations of copyright infringement," he said in a statement.
"Section 92A still needs to be fully repealed. It is disproportionate and unfit for purpose. But this deferral is a good start.
"The highly visible blackout campaign organised by the Creative Freedom Foundation and its supporters has served to bring the issue into mainstream debates, and we applaud the efforts they have taken," he said.
The PM said that the Government would not allow the internet to be the "wild west" where any copyright holders did not have entitlement to compensation or recognition of their work.
However, its interactive nature led to different issues from the traditional media, Mr Key said.
New Zealand's international commitments and potential trade deals all needed to be backed up by copyright rules.
Mr Key has been advised that it was not possible to codify in law how copyright protection would work in practice and implementation of copyright law was best organised through a code of practice.
Earlier today political bloggers from all sides of the political fence took blogs down to protest Section 92A of the Copyright Act.
Some big name blogs took part. Public Address, Scoop, Kiwiblog, The Standard, No Right Turn, Frog Blog, Whale Oil, Not PC, No Minister, Just Left, The Hand Mirror, Roar Prawn, Policy Net, Kiwi Politico and a multitude of other sites including Scoop News, PublicAddress.Net, Throng, GeekZone, and Street Talk have shut their doors in protest.
Instead of their usual coverage, visitors to these sites will instead be pointed to the online petition organised by the Creative Freedom Foundation.
Kiwiblog's David Farrer welcomed the delay in introducing the controversial legislation.
"Great to see National take action on this issue, after listening to concerns," he wrote on Kiwiblog.
"And also well done to all those involved in highlighting the problems with S92A, especially the positions being taken by certain rights holders groups that they should be allowed to both make the complaints, and adjudicate on its validity."
- NZ HERALD STAFF / NZPA