The Water Corporation pipeline, planned to service Perth's growing northern suburbs, was pulled out of the Environmental Protection Authority's assessment process last month.
The project stretches from Lancelin to Forrestfield.
For more than a year, Swan Valley winemakers and grape growers have worried about the impact the pipeline would have on local tourism and agriculture.
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READ NOWThree routes were outlined for the proposed northern corridor pipeline, two of which would pass directly through the Swan Valley's major viticulture areas and one that would have minor impacts.
The project will now go back to the drawing board and the Department of Premier and Cabinet will start seeking public comment next year. The Commonwealth Department of Environment will assist with the consultation.
The failed plan is a relief to Swan Valley Progress Association chairman Rod Henderson, who said a significant threat had been averted "for now".
The association has been working with the City of Swan and State Government departments to encourage a whole government approach to land bound by the Swan Valley Planning Act.
The planning act for the Swan Valley aims to protect the viticulture industry from inappropriate developments.
Swan Hills MLA Frank Alban said it was not the first time government departments had ignored the Swan Valley Planning Act.
"People have to start realising don't come up with stupid proposals for the Valley; think it out before you submit and get everyone upset," he said.
"It's a protected area, protected by the SVPA; it's iconic and it's important to all of the State for tourism and other reasons.
"We won't be trodden on " they are still treating us like kids."
Mr Alban said local Members should be consulted earlier in the planning process so obvious mistakes could be detected early.
Water Minister Mia Davies did not say why the current proposal was withdrawn but said water infrastructure corridors would continue to be investigated.
"Long-term planning for bulk water and wastewater infrastructure is needed to cater for population growth and improve water security for Perth's northern suburbs," she said.