The announcement followed stinging criticism by President Jalal Talabani, a Kurd, over the methods used to pass the law despite a Kurdish walkout to protest a secret ballot on a section dealing with the disputed city of Kirkuk.
Talabani accused lawmakers of using unconstitutional means to push the legislation through "against the will of the second-largest parliamentary bloc," warning it could jeopardize national unity and provoke sectarian tensions.
The Kurds hold 58 seats in the 275-member parliament and traditionally ally themselves with majority Shiites.
Iraqi laws must be ratified by the presidential council. But Talabani and Vice President Adel Abdul-Mahdi, a Shiite, rejected the election plan while Sunni Vice President Tariq al-Hashemi was abroad, deputy parliamentary speaker Khalid al-Attiyah told The Associated Press.
Talabani said in his earlier statement that he could not approve a law that was passed by only 127 members of the 275-strong parliament. The body had claimed it had a quorum and the measure was approved by a majority of the 140 lawmakers present.
The president also reprimanded lawmakers for using the secret ballot instead of "dealing with the disputed issue on the basis of consensus or agreements."
"The president is looking for a responsible stance by the political movements and the presidency of the parliamentary blocs, to correct that flaw," Talabani said.
It was the latest setback for efforts by Prime Minister Nouri al-Maliki's government to overcome criticism that it has failed to take advantage of security gains to make political progress.
The State Department acknowledged the debate over the law was "quite contentious."
"Iraqis are facing a number of challenges in their country.
This is clearly one of them, but it is also a sign of democracy at work," State Department spokesman Gonzalo Gallegos said. "We urge all parties to remain engaged and to work together and to find a path forward that will allow for provincial election in 2008."
Iraq's electoral commission has said the provincial balloting already needs to be delayed until Dec. 22 because it was too late to make the necessary preparations.
Before the council's decision was announced, an official in the commission said "the date will be changed to sometime in 2009" if the law was rejected. The official spoke on condition of anonymity because of security concerns.
Al-Attiyah, a Shiite, and other critics also have predicted the rejection would make a vote unlikely before next year.
Kurdish legislators, along with the two deputy parliament speakers, walked out Tuesday after the Sunni speaker Mahmoud al-Mashhadani called for a secret ballot to break the deadlock over an article that included a requirement for ethnic power-sharing in Kirkuk.
Kurdish opposition to the equal distribution of provincial council seats among Kurds, Turkomen and Arabs in the oil-rich Kirkuk region - outside Kurdish territory but considered by many Kurds to be part of their historical land - has been a major factor in stalling the law's approval.
The draft law also would transfer security responsibilities in Kirkuk to military units brought from central and southern Iraq instead of those already there, an apparent move against Kurdish forces heavily deployed in the area.
"We declare that the Kurdistan region is not bound by the results of this unconstitutional process," the Kurdish Regional Government, which oversees the three provinces in its semiautonomous territory, said in a statement.
The elections are expected to redistribute power in Iraq's 18 provinces in what is considered a necessary step toward reconciliation. Many Sunni Arabs boycotted provincial balloting in January 2005, enabling Shiite Muslims and Kurds to win a disproportionate share of power.
A preliminary election law setting the October deadline for the vote had been touted as a sign that al-Maliki's government was making political progress, in addition to security gains. But the Iraqis then deadlocked over a follow-up law establishing guidelines and funding for the vote.
