It had hoped to raise up to €9.5bn (£8.3bn) and help convince markets its public finances are in order.
What would have been Spain’s biggest-ever initial public offering had met with fierce resistance from the People’s Party, which opinion polls give a commanding lead ahead of parliamentary elections in November.
Spain set up a company called SEVALAE in December 2010 with a view to privatising a 30 per cent stake in Loterias y Apuestas del Estado.
“At this time, the situation in the capital markets is different to what it was then, and SEVALAE, with due assessment, considers conditions do not exist to guarantee proceeds reflecting the value of Loterias,” a ministry statement said.
Spain’s securities regulator had been expected to publish a prospectus for the IPO this week after the Spanish Cabinet approved the sale on Friday and kicked off the sale on 19 September.
Spain’s economic ministry said the banks advising it on the deal were warning the deal could fetch less than Loterias’ €20.8bn book value.