The Australian and Western Australian governments committed to build a memorial in Perth in 2014 and had already put the $126,000 project out to tender, reports the Guardian.
Western Australia premier Mark McGowan said he had decided that building a memorial before the plane was found was insensitive.
"This is a complex and highly sensitive matter, and the wellbeing of the relatives of those missing has always been our number one priority," McGowan said in a statement.
"While some relatives were supportive of the memorial, others had concerns. It was decided in the best interests of all concerned not to proceed with the memorial at this point in time."
The Boeing 777 with 239 people onboard disappeared en route from Kuala Lumpur to Beijing on March 8, 2014.
The plane is believed to have gone down in the Indian Ocean. The Australian, Malaysian and Chinese governments have funded four years of searches.
A $200 million effort funded by the Malaysian government was called off in May, after five months of searching.
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