The Cyber Information Sharing and Protection Act CISPA), which passed the House of Representatives last week, has stalled in Congress' upper house.
The legislation will almost certain be be shelved by the Senate, according to US media reports.
All sides have agreed domestic and foreign hackers pose a major security threat.
But a number of lawmakers thought CISPA went too far, or was misguided. The legislation would have allowed the federal government to share information with private companies about individuals who pose a "cyber threat" - and private companies to share information with the government.
President Obama has threatened to veto CISPA if passed.
The Americal Civil Liberties Union and other lobby groups expect the legislation to re-appear in modified form.