The case was due to be heard next week, but Betsi Cadwaladr health board will now consult on the future of services at Ysbyty Glan Clwyd in Bodelwyddan.
It had planned to reduce services to midwife-led care only.
Interim chief executive Simon Dean apologised for the "difficult period of uncertainty and worry".
He added: "After very careful consideration following legal advice and despite significant ongoing concerns about the obstetric service at Glan Clwyd Hospital, we have advised the court that we no longer seek to contest the judicial review brought against us.
"I wish to make it clear that the legal process is ongoing and has not yet been concluded.
"We all acknowledge what a difficult period of uncertainty and worry this has been for our staff and patients, for which we are very sorry."
Ann Jones, Labour AM for the Vale of Clwyd, said the decision marked "a stage to move forward and for the board to work hard to regain peoples trust whilst continuing to provide vital public services".
Shadow Health Minister Darren Millar said: "I'm glad that NHS chiefs have finally caved in, but it shouldn't have taken the threat of judicial review for the health board to do the right thing."
The health board had been expected to go ahead with the plans to end consultant-led services in April, but the bid for a judicial review put them on hold.
Llyr Gruffydd, Plaid Cymru's North Wales AM said: "They ignored nurses, midwives, doctors, patients and the general public on this matter and ploughed ahead without even a consultation. This arrogance from senior management must stop."
Liberal Democrats' North Wales AM Aled Roberts called it a "botched process" that had "gone on for too long".
A health board has performed a U-turn over plans to contest a judicial review into downgrading maternity services at a Denbighshire hospital.