The Quadriga Prize is given annually to “role models who are committed to enlightenment, commitment and welfare”.
The decision to give it to Mr Putin was angrily received by his critics, who said it made a mockery of the award.
Former Czech President Vaclav Havel had threatened to return his own prize in protest at last week’s announcement.
The Quadriga, named after the statue on top of Berlin’s Brandenberg Gate, is awarded annually on the anniversary of German re-unification and is “dedicated to all those whose courage tears down walls and whose commitment builds bridges”.
The award’s organisers said they were retracting Mr Putin’s award with “great regret,” citing “massive criticism in the media and the political world” over their choice.
“The growing pressure was becoming increasingly unsustainable and risked escalating further,” they said in a statement.
No awards will be given in 2011 and the panel said they would “see how it continues next year”.
Mr Putin was to be recognised for his “service to the dependability and stability of German-Russian relations”, but the move immediately came under fire both in Germany and abroad.
His critics say that while serving as president between 2000 and 2008, Mr Putin – a former KGB spy chief – oversaw oppressive government policies and curbs on civilian liberties.
Germany’s human rights commissioner Markus Loening said it was “downright cynical” for Mr Putin to be put in the same group as previous winners Mikhail Gorbachev and Mr Havel.
“It devalues the prize,” he said last week.
Last year’s winner, Danish artist Olafur Eliasson, had already returned his award and Mr Havel threatened to do the same.
On Saturday, a spokeswoman for Mr Havel said he thought the panel were “very wise” to reconsider their choice.
The award should be given to people “who devoted their lives to protection of human rights and freedoms and promoting democracy,” she said, naming Chinese dissident Liu Xiaobo, Russian rights campaigner Sergei Kovalov and Russian journalist Anna Politkovskaya, who was shot dead in 2006.
A spokesman for Mr Putin said the row would have no effect on Russia-German ties and that Moscow would “treat with respect any decision by this organisation”. – BBC news