Lecturers' union Natfhe feared that many colleges which have prison education contracts would lose out to private providers under "Project Rex" - the Home Office and Department for Education and Skills' plan to invite bids from private companies.
Natfhe has been told that existing prison education providers will have their contracts extended by two to three years while the department goes back to the drawing board about how the service will be delivered in the future.
Christiane Ohsan, Natfhe officer dealing with prison education, said: "We welcome the end of the procurement process which has wasted time, money and resources which should have been spent on improving the education service to offenders.
"Re-tendering only dissipated expertise which had been established over many years. We now look forward to a period of stability for our members."
In a letter to senior prison staff, Susan Pember, of the offenders'
learning and skills unit at the DfES, said: "While our original aim was to secure provision in prisons through an external procurement exercise, other developments mean this is no longer the best option to pursue and we have therefore halted the procurement exercise."
The Learning and Skills Council will review the future of prison education.
It is believed that ministers have listened to fears that the expertise of existing contractors needs to be retained.
Ms Pember's letter continues: "We are certain that we shall continue to have a very positive relationship with many existing providers and, whatever the details of the new model of delivery, your experience and skills will be very valuable in building the stronger service we all want to see."
The announcement comes a a victory in Natfhe's campaign to stop the tendering process.
It had been urging ministers to create individual learning plans for inmates and to allow the Learning and Skills Council into the system.
The DfES has now said it is looking at these ideas.
Ms Pember said a "new approach" to prison education is likely to be put to the test through "pathfinder projects" around the country.
She said individual learning plans for prisoners would be based on assessment of their educational needs soon after they are admitted.