The pipeline had been set to cross under the Missouri River and man-made Lake Oahe, which are drinking water sources for the Standing Rock Sioux Tribe.
"It's clear that there's more work to do," Jo-Ellen Darcy, the US Army's assistant secretary for civil works, said in a statement.
"The best way to complete that work responsibly and expeditiously is to explore alternate routes for the pipeline crossing."
The Standing Rock Sioux objected to building the 1,172-mile pipeline underneath the river and lake because of fears of possible leaks. The tribe also said the route would cross through areas with sacred historic artifacts.
The conflict between the tribe and pipeline operators Energy Transfer Partners and Sunoco Logistics Partners galvanized North American native tribes and supporters, who have camped in the thousands near the construction site for months in an effort to block it.
'Do the right thing'
Some 2,000 US military veterans joined the protest this week in a symbolically important move before a deadline for demonstrators to vacate the area on Monday.
"We wholeheartedly support the decision of the administration and commend with the utmost gratitude the courage it took on the part of President Obama, the Army Corps, the Department of Justice and the Department of the Interior to take steps to correct the course of history and to do the right thing," Standing Rock Sioux chairman Dave Archambault said in a statement.
"We are not opposed to energy independence, economic development, or national security concerns but we must ensure that these decisions are made with the considerations of our indigenous peoples."
Pipeline operator Energy Transfer Partners did not immediately respond to a request for comment.
However, a group representing the pipeline operators, the Midwest Alliance for Infrastructure Now, condemned the decision, blaming it on President Barack Obama.
"This purely political decision flies in the face of common sense and the rule of law," it said in a statement. "Unfortunately, it's not surprising that the president would, again, use executive fiat in an attempt to enhance his legacy among the extreme left."
The Dakota Access Pipeline would snake through four US states, delivering oil from North Dakota to Illinois, where it can be shipped to other parts of the country.
It could help reduce the cost of transporting North Dakota oil, enabling it to better compete with cheaper oil from Canada.
The Standing Rock Sioux Tribe filed a lawsuit saying it was railroaded by the pipeline's developer and the US Army Corps of Engineers, responsible for approving construction under the river, but a federal judge denied its request to halt construction in September.
However, the government suspended the pipeline construction project last month, saying more analysis and debate were needed.
Energy Transfer Partners and its co-operator Sunoco Logistics Partners struck back, asking a court to stop regulators from further delaying the project.
The standoff turned violent at times, including last month, when hundreds of protesters clashed with police who fired tear gas, rubber bullets and a water cannon, soaking the crowd in subfreezing temperatures.
Protest organizers said 167 people were hurt, including three Native American tribal elders, and that seven people were hospitalized for severe head injuries.
The standoff has prompted sympathetic protests nationwide, with celebrities, politicians and environmental activists joining the cause.
News of the Army's decision prompted celebration and relief among those who opposed the pipeline route.
"Today, the voices of indigenous people were heard," Rhea Suh, president of the Natural Resources Defense Council, tweeted. "The Standing Rock Sioux & indigenous communities remind us of power of individuals to stand up to demand environmental justice."
Among the project's supporters, North Dakota's Republican Governor Jack Dalrymple, who had ordered the protesters to evacuate on Monday, called the decision a "serious mistake."
He was joined by the state's sole member in the House of Representatives, Kevin Cramer, who said in a statement, "I’m encouraged we will restore law and order next month when we get a president who will not thumb his nose at the rule of law."
But Vermont Senator and former presidential candidate Bernie Sanders praised Sunday's decision, saying, "I appreciate very much President Obama listening to the Native American people and millions of others who believe this pipeline should not be built."