"We will not do it," Gabriel told German public broadcaster ARD.
The VDIK association of foreign automakers said Friday that around 3.3 million vehicles, roughly 30 percent of all foreign cars in the country, were unable to use the mix of ethanol and traditional petrol that Berlin sought to impose.
Gabriel had warned that the project would be abandoned if more than one million vehicles could not use the fuel.
"It is not a measure dealing with environmental policy, but a measure destined to aid the automobile industry," he added.
The news dealt a blow to so-called green fuels which have been presented as a way to reduce global warming but which have also been criticized by ecologists and the German automobile club.
The E10 project was supposed to ensure that 10 percent of petrol used by cars and light trucks in Germany was comprised of ethanol to reduce carbon dioxide emissions. But the result was more corrosive than classic petrol and threatened to wear out certain engine parts too quickly, in particular in cars that were more than 15 years old.
The decision is a setback however for the government, which sought to go further than the European Union in setting standards for cutting carbon dioxide emissions. Biofuels were billed as a key contributor to the effort.
"There is no need for Germany to go it alone," VDIK president Volker Lange said in a statement. "All environmental protection strategy must be harmonized and applied on
the European level."
E10 has also come under fire from environmental groups such as Greenpeace, which criticizes the conditions under which colza and soja used in the fuel is grown.
The powerful German automobile club ADAC has noted meanwhile that E10 fuel would represent a surcharge for consumers.
Berlin has nonetheless not abandoned plans to reduce CO2 emissions by 40 percent by 2020 compared with their 1990 level.
Dropping the E10 project means however that other sectors, in particular electricity production, will have to increase the share of its production from renewable sources to 30 percent from 27.5 percent, Gabriel said.
To meet EU auto emission targets of an average 120 grams per kilometre, the car industry "will also have to come up with other technical measures," he added.
"That will certainly please auto parts makers," the minister added.