It said it took the decision in light of what it called the customer and public unease at the move to stop accepting cash at so many branches and pull out ATMs out of those branches.
It said there has been a dramatic rise in the use of digital banking services and a decline in branch visits and cash usage.
There has been a 36pc decline in cash withdrawals from ATMs and a 50pc fall in cheque usage over the past five years.
AIB has also seen a fall of almost 50pc in branch over-the-counter teller transactions, while mobile and online payments have increased by 85pc in that same timeframe.
“It was in the context of this evolving banking environment and the opportunity to enhance its long- standing relationship with An Post that AIB took the decision to remove cash services from 70 of its branches.
“However, recognising the customer and public unease that this has caused, AIB has decided not to proceed with the proposed changes to its bank services,” the bank said.
The move represents an embarrassing climb-down for AIB boss Colin Hunt.
Finance Minister Paschal Donohoe welcomed the U-turn.
It comes a day after Taoiseach Micheál Martin has sought a meeting with Mr Hunt after calling on the bank to reconsider its decision to remove cash facilities at the branches across the country.
And the Central Bank had joined Mr Martin in turning up the heat on AIB over its plans to refuse to allow cash transactions at almost half of its branches.
The Central Bank said that vulnerable customers should have full access to basic banking services.
AIB plans to add another 70 branches to the 22 that have already gone cashless and is removing ATMs at the 70 branches.
The Taoiseach has taken the unprecedented move of calling in AIB chief executive to discuss the move to downgrade so many branches.
It is understood that Finance Minister Paschal Donohoe was given no notice by AIB of its intention to announce on Tuesday that it was turning 70 of its 170 branches cashless this autumn.
The move has sparked a furious political backlash with numerous TDs lining up calling for a reverse to the decision.
The Central Bank of Ireland has said that the development is a commercial decision for the board of AIB.
But it added it “expects all regulated entities, including banks, to ensure that the impact of its decisions is considered carefully and with a consumer-focused approach.”
The regulator said banks should assess the impact of any decision or plan across their full customer base, including vulnerable customers, and ensure that any changes to branches are made in an orderly manner.
“The Central Bank expects banks to provide vulnerable customers with the assistance necessary to ensure that those customers retain full access to basic banking services, including at another location.”
AIB had said that it will expand its relationship with An Post, where more cash and cheque services will be made available.
But Green Party Minister Ossian Smyth has described AIB's plan to turn 70 branches cashless as an “opportunity” in community banking for post offices and credit unions across the country.
“I think it’s important that people in rural areas have access to banking, I’m happy to see that it will be possible to continue to lodge cash or withdraw cash from a post office to your AIB account and I think that Bank of Ireland are taking the same approach,” he told RTÉ’s Morning Ireland today.
“I want to see the network of rural post offices strengthened and with that in mind we announced a special subsidy for all post masters to make sure that all post offices stayed in business.
“And we were looking for ways to strengthen the post office to offer more services through the post office and I think this could be the thing that would make them last.”
Mr Smyth said it is “unfortunate” that this decision was made by AIB ahead of the publication of the review of consumer banking.