The Conservative leadership candidate had said she wanted to introduce regional pay boards, in a bid to save a potential £8.8bn.
However, there was a fierce backlash to the policy from several senior Tories, who argued it would mean lower pay for millions of workers outside London.
The Truss team has now said the proposal will not be taken forward.
A spokesperson for the leadership hopeful said there had been “a wilful misrepresentation of our campaign”.
They said: “Current levels of public sector pay will absolutely be maintained. Anything to suggest otherwise is simply wrong.”
Former Chancellor Rishi Sunak and Foreign Secretary Ms. Truss are vying for support from Conservative members to replace Boris Johnson as Tory leader and prime minister.
Announcing the policy on Monday night, Ms. Truss had said she wanted “a leaner, more efficient, more focused Whitehall” and set out plans which suggested savings of £11bn a year.
This included £8.8bn which would come from introducing regional pay boards, meaning that civil servant pay – and potentially later other public sector workers’ salaries – could be adjusted to reflect the area where civil servants work.
It could have seen workers in, for example, the south-west or north of England paid less than those in the south-east.
In addition to saving money, the Truss camp also argued it would help boost growth in areas, where the private sector had been crowded out by public sector salaries.
However, the proposal was dropped after just over 12 hours when it was met with strong resistance from some Conservatives.
A spokesperson from Mr. Sunak’s campaign described the U-turn as dramatic.
“It demonstrates a lack of serious judgment by setting out plans that would see pay dramatically cut for police, nurses, and our armed forces in Cardiff and Canterbury, Teeside and Taunton during a cost of living crisis,” they said.
“It also shows a worrying lack of grip of detail in what is already a woolly economic plan.
“If this was in a general election, it would have been a potentially fatal own goal for the Conservatives.”
And Tees Valley mayor Ben Houchen – who is supporting Mr. Sunak – described the policy as “horrifically bad”, telling the BBC’s World at One it could lead to more scrutiny of policy from the foreign secretary.
“There are lots of tasty soundbites from Liz – what we’re now seeing is that as people start to scrutinize that detail it can unravel quite quickly,” he said.
Liz Truss is widely thought to have been ahead in the Tory leadership race.
She had momentum in the campaign – and had avoided any significant errors.
Until now.
This policy has attracted huge criticism from opposition parties – and many Conservative politicians supporting Rishi Sunak.
They argued regional pay boards would have been “leveling down”.
Speaking to Mr. Sunak’s allies this afternoon, they argue Ms. Truss’s plans are unraveling and that it was a “catastrophic error of judgment”.
Team Sunak will hope this starts to change the dynamic of the campaign – and potentially put him back on the front foot just as Tory members start voting.
Team Truss will hope that junking the policy quickly will limit the damage.
A number of Conservative MPs in the southwest of England also attacked the policy, including Sunak ally Steve Double who said it would be “hugely damaging to public services in Cornwall, where we already struggle to recruit NHS staff”.
Another Sunak supporter – and former chief whip – Mark Harper said the Truss campaign should “stop blaming journalists” adding “reporting what a press release says isn’t ‘wilful misrepresentation”.
Labour’s shadow chancellor Rachel Reeves said the proposal “reveals her [Liz Truss’s] priority would be to slash the pay packets of working people”.
Liberal Democrat leader Sir Ed Davey said: “U-turning on a multi-billion-pound policy five weeks before even taking office must be a new record.”
Ms. Truss has been seen as the frontrunner in the race for No 10, with several polls showing her to be more popular among the Conservative party members.