Conservative home secretary Theresa May had hoped to introduce the scheme next year but it will now only go ahead in one pilot area, with a nationwide roll-out delayed until after the 2015 general election.
Housing charities had warned that the proposal would simply drive illegal immigrants into the hands of unscrupulous landlords, rather than encouraging them to leave the country.
This means hundreds of thousands of private landlords no longer face the prospect of £3,000 fines for failing to request sufficient paperwork from their tenants.
May said the draft immigration bill – published yesterday – would still create a “hostile environment” for illegal immigrants and require temporary migrants to pay for NHS care.
In addition, banks will have to check that their customers are not on a list of known illegal immigrants before allowing them to open an account. Foreign criminals will also be deported before their appeals are heard.