The decision on the coal-fired plant at Dawei comes four months after the controversial Chinese-funded Myitsone hydroelectric dam was halted.
The move is seen as another indication of burgeoning political and economic reforms.
The announcement came from Minister for Electricity Khin Maung Soe.
Speaking to reporters in Rangoon, he said that the decision to stop construction of the power station had been taken after “listening to the people’s voice and reading the concerns about the environmental impact of this plant in local media reports”.
The 4,000-megawatt plant would have formed part of the huge Dawei development on Burma’s southern coastline and activists had warned the project could trigger an influx of “dirty” industry.
“This is a pre-emptive move from a government that is increasingly worried about public opinion and stability.”
On Monday, Australia announced that it was easing some of its sanctions as a response to political reforms introduced by the new military-backed civilian government.