The cabinet agreed on Tuesday to put the proposed Chana Industrial Estate on hold.
Deputy Agriculture Minister Capt Thamanat Prompow said a panel would instead be set up to review the project in Songkhla as a group of residents protested in Bangkok and following intense local resistance.
The deputy minister delivered the news personally to the Chana Rakthin (Love Chana) protesters at Chamai Maruchet Bridge near Government House. On hearing the cabinet's decision, the protesters agreed to disperse and return home.
Capt Thamanat said the project would be suspended although studies, including that of the Environmental Health Impact Assessment (EHIA), would continue.
The cabinet acknowledged the concerns of the Chana protesters, who had insisted that all previous resolutions of the cabinet and the Songkhla city plan be scrapped.
All work that has already begun on the estate's construction, plus that which is set to proceed soon, is to be stopped.
The protesters had also demanded that a strategic environmental assessment (SEA) be conducted by a panel made up of members who must include a "proper number" of representatives of civic organisations and academics familiar with local environmental issues.
The cabinet agreed in May last year to the Chana estate becoming a model for future industrial developments by the Southern Border Provinces Administrative Centre (SBPAC).
The centre had hoped the estate would boost the local economy and, in turn, help eliminate the insurgency that has plagued the South for years.
However, the project has been slammed by local communities and civic rights groups, especially after the government reportedly planned to rezone the land from agricultural to industrial use.