Youth Justice Minister Leanne Linard said the plan for a 28 to 30-bed facility in Caloundra on the Sunshine Coast - set to cost $16.4 million over four years - will not proceed as it "wasn't the right place".
"We welcome the feedback, we listened to the community's concerns and we have acted on those concerns," she said in a statement on Monday.
The Liberal National Party have labelled the move a "humiliating backdown" after 6000 locals signed a petition against the facility.
LNP leader David Crisafulli said the decision is a win for the community following months of backlash.
"It shouldn't have come to this, this was never a good idea. In the end people power got the result," he told reporters.
The watch house will continue to be used by police while the government looks for other options to boost youth detention centre capacity across Queensland.
Youth jails have been under growing pressure since the government's controversial crackdown on youth crime began in April following three high-profile killings involving stolen cars last year.
New laws allow courts to fit teen offenders with GPS trackers and remove the presumption of bail for those caught committing serious offences while on bail.
The Queensland Children's Court said the crackdown has resulted in an average of 233 youngsters in custody on any given day in 2021, up from 208 in 2020.
Children are in custody waiting for their cases to be heard for an average of 309 days, or more than 10 months, which is longer than most sentences, the court's annual report said.
Meanwhile, there have been attempts to fit five GPS devices, only one successfully, with Mr Crisafulli saying the trial was nothing but a publicity stunt.
In October parliament voted against a motion to scrap the GPS tracker trial, which Greens MP Michael Berkman labelled a politically motivated attack on vulnerable kids.
Despite the capacity pressure on youth detention centres, and their campaign against the Caloundra facility, the LNP have renewed their call for breach of bail to be reinstated as an offence.
"We are going to put forward our solution to the youth crime crisis," Mr Crisafulli said.
"Breach of bail must be an offence for a young criminal ... no ifs, no buts.
"Because right now you have a generation of young criminals who know their way around the law.
"They know they can reoffend and no one will hold them accountable."
Meanwhile, a parliamentary hearing on a Greens bill to raise the age of criminal responsibility to 14 is set for February 14.
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