The government does not want to limit access to the Swiss labour market for 17 European Union member states despite concerns about increasing domestic unemployment.
The decision means that citizens from neighbouring Germany, France and Italy will continue to have unrestricted access to jobs in Switzerland.
The reintroduction of quotas would have had a limited impact and would have resulted in more paperwork, particularly for small and medium-sized enterprises, the justice ministry said.
"The quotas would include 44,000 permits. The impact would therefore be relatively modest as a result," the government said in a statement following a meeting on Wednesday.
The business community, trade unions and the country's 26 cantons had come out against plans to shield Swiss workers from foreign competition.
The justice ministry added that an influx of qualified foreign labour from the EU over the past two years had not harmed the country's workforce, and that there was not enough political support in Switzerland for the restrictions.
"Resorting to quotas would send a bad signal to other countries in Europe," the statement said. The EU is Switzerland's main trading partner and crucial for the country's key export sector.
Brussels had hinted that the reintroduction of quotas would be unpopular among EU member countries.
"I would regret to see Switzerland's image dented," said Jacques Barrot, one of the European Commission's vice-presidents.
All of Europe had been hit by the financial and economic crisis and governments were under pressure by nationalists, Barrot told the Tuesday edition of the Geneva-based Le Temps newspaper.
The rightwing Swiss People's Party was the only important political force to openly support quotas.
The government asked the justice and economics ministries to follow developments in the job market and to keep a close eye on immigration figures.
It also pointed out that the number of new immigrant labourers was likely to decrease and that restrictions, particularly for highly qualified people, could be an obstacle once the economy improved.
"The economy has to have timely access to qualified labour," the justice ministry said.
Switzerland, which is not a member of the EU, gradually opened up its labour market in 2002 following a nationwide vote on a series of bilateral treaties on labour, trade, and transport.
The agreement was later extended to the newer EU members.
As part of the labour accord, also known the free movement of people accord, Switzerland is allowed to temporarily block access to its job market if the number of work permits issued to EU residents exceeds a certain limit.
The unemployment rate has been increasing over the past few months and reached 3.5 per cent in April.
Last week, the government decided to extend existing labour restrictions for eight eastern European countries including Poland, Hungary and the Czech Republic.
Urs Geiser, swissinfo.ch
Switzerland, which is not an EU member, gradually opened its labour market to EU citizens beginning in 2002.
Voters repeatedly confirmed a key labour accord, including its extension to the newer EU member states.
The EU is Switzerland's main trading partner.
Switzerland has concluded 20 major bilateral treaties with Brussels. Negotiations are underway on accords on electricity, food safety and agricultural free trade.
Both sides are also embroiled in a dispute over preferential tax rates for companies from EU countries in Switzerland.
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