The council said it had withdrawn support for the scheme in a letter to residents on Thursday, following two public consultations.
“We believe there is a very strong democratic mandate that the pedestrianisation scheme that was under consideration is not what local people want,” it stated.
“As a result, Westminster City Council has taken the pedestrianisation of Oxford Street off the table for good.”
London mayor Sadiq Khan described the decision as a “betrayal” and said it “poses a real threat” to the future of the shopping area.
Council leader Nickie Aiken called for a “rethink of the whole strategy” and said the council will work on proposals to improve the district.
She added: “Doing nothing to improve the area is not an option either if we are to maximise the potential benefits from the opening of the Elizabeth Line.
“We must future-proof Oxford Street and the surrounding district so it remains the pre-eminent shopping district in the UK and maintains its crown as the nation’s high street in an ever-changing business and retail environment.”
The measures were set to be implemented by December to coincide with the launch of Elizabeth line services, which is expected to boost visitor numbers.
Mr Khan said: “This will be seen as a betrayal of the millions of Londoners and visitors to our city who would have benefited from making Oxford Street a safer, healthier and better environment.
“All the main mayoral candidates agreed on the need for the pedestrianisation of Oxford Street at the last election, as did Westminster Council until today.”
He added: “This now poses a real threat to the future of Oxford Street, which could not be worse timed, coming on the same day House of Fraser announced they will be closing their Oxford Street store.”