The decision means the future of the oil fields are now in the hands of the courts.
The Rosebank oil field 145 kilometres (90 miles) off the Shetland Islands was approved by the previous Conservative government in September 2023.
It is the UK's largest untapped oil field, estimated to contain up to 300 million barrels. Drilling was expected to begin between 2026 and 2030.
The Jackdaw gas condensate field is being developed 155 miles east of Aberdeen and is expected to start production in 2025.
Rosebank is owned by Equinor and Ithaca Energy, and Jackdaw is owned by Shell.
"The government will not challenge the judicial reviews brought against development consent for the Jackdaw and Rosebank offshore oil and gas fields in the North Sea. This decision will save the taxpayer money," the government said in a statement.
Energy Minister Michael Shanks said the government was "committed to making Britain a clean energy superpower" but that while making the transition "the oil and gas industry will play an important role in the economy".
The government, however, said it would not withdraw the licences agreed by the last government.
Prime Minister Keir Starmer confirmed before the July election that brought Labour to power after 14 years in opposition that his government would uphold existing oil and gas licences, while banning any new ones.
The government said it would now "consult at pace" on the implementation of its manifesto position not to issue new oil and gas licences, in light of a Supreme Court ruling requiring regulators to consider the climate impact of new projects.
If the courts back the ecological groups over the projects, operators would need to resubmit environmental assessments, adding costs to the projects.
The government's decision was welcomed by Greenpeace.
Mel Evans, UK climate team leader at Greenpeace, said not defending legal action brought against the new oil and gas sites was "absolutely the right decision".
"These permits should never have been granted without being properly assessed for their impact on the climate, and following the Supreme Court ruling earlier this year, conceding these cases is the logical course of action.
"The two new fields combined would generate a vast amount of emissions while doing nothing to lower energy bills," he said.
A Shell spokesperson said: "Jackdaw was approved in 2022 and we are carefully considering the implications of today's announcement by the government."
har/pdh/gv
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