The policy would only be reintroduced if there was "an extreme change in circumstances", it said.
The decision was taken after the publication of a military report commissioned four months ago by Yaalon, which examined the effectiveness of policy.
According to a report published Thursday in the Haaretz daily, the military committee examining the issue reached the conclusion that no effective deterrence was proven, except in a few cases. It also found that the policy caused greater damage than benefits because the deterrence, if at all, was nothing compared to the hatred towards Israel that such demolitions generated among Palestinians. Since August 2002, the army has systematically demolished the houses of Palestinian militants found responsible for anti-Israeli attacks, particularly suicide bombings, as it believes it will deter others from following suit.
The policy has sparking repeated condemnations by human rights groups which claim it amounts to collective punishment and a breach of international law.
Three months ago, the Israeli rights group B'Tselem published a report which showed that for every house which was destroyed, 12 innocent people were made homeless.
Statistics in the 57-page report showed Israeli troops had demolished some 628 housing units in the wake of 333 anti-Israeli attacks, leaving 3,983 Palestinians homeless.
In less than three percent of the cases were occupants given prior warning of the military's intention to demolish their home, the report added, charging the demolitions amounted to a "war crime" and a "grave breach of international humanitarian law".