Yesterday Mr Osborne said he would not give the green light until turbulence in global markets had subsided.
He tweeted: “We’ll build a share-owning democracy. So British people can buy Lloyds shares but we’ll only sell when turbulent markets have calmed down.”
Prime Minister David Cameron pledged during the election to sell the final part of the public’s stake, which was expected to raise £2 billion.
Details of the sale were announced last October and it was expected to take place this spring.
But market turmoil caused by a slowdown in the Chinese economy has seen the share price tumble.
The government bought Lloyds shares for 74p when it used taxpayers’ money to bail out the bank as it looked to bring stability to the industry at the height of the financial crisis.
However, the Lloyds share price has fallen from 78p to 64p since October, meaning shares would have been sold at a substantial loss.
The government owns just under 10 per cent of Lloyds and 73 per cent of the Royal Bank of Scotland.
The announcement poses questions as to whether the Chancellor will now put on hold any plans to sell its remaining stake in RBS.
Laith Khalaf, analyst at Hargreaves Lansdown, said “This will be a big disappointment for the hundreds of thousands of investors who had queued up for a chunk of Lloyds, but taking a big loss on selling shares when markets are low was always going to be a bridge too far for the Chancellor.
“The fall in the Lloyds share price has left them around 10p below what the government thinks it needs to break even, and together with the planned 5 per cent discount and bonus share scheme would have meant the Chancellor putting his hand in his pocket, so now he looks to be pinning his hopes on a recovery in markets later in the year.”
Banking has been hit by a series of setbacks.
RBS and Santander revealed further pain in the long-running PPI scandal this week, with RBS setting aside £500m for mis-selling claims and Santander facing a £450m PPI charge. In his Autumn Statement, Mr Osborne said the government planned to sell a further £25 billion of RBS shares in the spring.
A spokesman for Lloyds said: “The timing of any future retail sale is a matter for the government. ”
Sales of public assets, including Royal Mail and Eurostar, raised more money for the government in 2015 than any other year in history.