Indian Prime Minister Manmohan Singh has put on hold all plans to privatise state-run companies following opposition from his alliance partners.
Mr Karunanidhi (left) is a major ally of the Congress government
Earlier on Thursday, a key ally of the governing Congress Party threatened to pull out of the government.
The move by the regional DMK party was in response to a plan to sell stakes in a state-run power company.
The government had hoped to raise about $500m (£272m) by selling 10% of the shares of the Neyveli Lignite Corp.
It was one of two state-owned firms, along with one of the country's largest aluminium manufacturers - National Aluminium Co Ltd - in which the government was planning to sell shares.
But a spokesman for the prime minister said that some of the government's allies had expressed concern over the privatisation, or disinvestment, process.
"Taking into account their concerns, the prime minister has decided to keep all disinvestment decisions and proposals on hold pending further review," the spokesman, Sanjaya Baru, is quoted as saying by the Press Trust of India.
The DMK is a regional party based in the southern state of Tamil Nadu where the Neyveli Lignite Corp is located.
Nearly 35,000 workers at the company went on strike on Tuesday night in protest against the plan to sell shares in the company.
They called off their protest on Thursday evening and have now returned to work.
DMK President and Tamil Nadu Chief Minister K Karunanidhi said he backed the workers.
"We are considering whether we should continue in the government," he was quoted as saying by PTI.
The move to sell shares in the two companies was approved by the federal cabinet last month.
But the government has come under increasing pressure over the issue from some of its allies as well as Communist parties on whom it is dependent on support.
Analysts say the latest decision is a major setback for the country's privatisation programme.