Israel's prime minister, Binyamin Netanyahu, has cancelled a pilot scheme banning Palestinian workers from Israeli buses in the occupied territories – denounced as tantamount to apartheid – only hours after it was announced.

The plan had been approved by Netanyahu's defence minister, Moshe Ya'alon, but was cancelled amid fierce criticism from Israeli opposition figures, human rights groups and a former minister in Netanyahu's own party, who said it was a "stain on the face of Israel" that would damage its international image.

The move had been enthusiastically welcomed by settler groups and pro-settlement MPs who had long been lobbying for the ban.

The three month pilot scheme – which had been due to come into force on Wednesday – would have imposed strict new controls on thousands of Palestinians with permits to work in Israel, insisting they travel home through certain designated checkpoints and banning them from using Israeli run buses in the occupied West Bank.

The timing of the scheme's launch – during visits by Sepp Blatter, the president of Fifa, world football's governing body, and the EU's foreign policy chief, Federica Mogherini – had seemed bizarre. Blatter is seeking to defuse moves to have a vote on Israel's suspension from Fifa for alleged discrimination against Palestinians.

The Israeli opposition leader, Isaac Herzog, had immediately condemned the scheme.