"Our new missile defense architecture in Europe will provide stronger, smarter and swifter defenses of American forces and America's allies," Obama said in an announcement from the White House.
Anticipating criticism from the right that he was weakening America's security, Obama said repeatedly that this decision would provide more - not less - protection.
"It is more comprehensive than the previous program, it deploys capabilities that are proven and cost effective, and it sustains and builds upon our commitment to protect the U.S. homeland," he said.
With the announcement, Washington scrapped what had become a politically troublesome plan, and one the Pentagon says was ill-suited to the true threat from Iran. In its place would be a system the Pentagon contends will accomplish the original goal and more.
Defense Secretary Robert Gates said Iran's changing capabilities drove the decision, but he acknowledged that the replacement system is likely to allay some of Russia's concerns.
Obama also made a pointed reference to Russia and its heated objections to the shield. "Its concerns about our previous missile defense programs were entirely unfounded," Obama said.
The missile defense system planned under the Bush administration was to have been built in the Czech Republic and Poland. Obama phoned Czech Prime Minister Jan Fischer Wednesday night and Polish Prime Minister Donald Tusk Thursday morning to alert them of his decision.
It was immediately unclear whether any part of the new system would still be hosted by those nations, which agreed to host the Bush-planned shield at considerable cost in public opinion and their relations with Russia. Obama said the U.S. will continue to work cooperatively with what he called "our close friends and allies."
Criticism came immediately from Republicans.
Rep. Eric Cantor of Virginia, the second-ranking Republican in the House, said he would "work to overturn this wrong-headed policy."
"Scrapping our missile defense effort in Europe has severe consequences for our diplomatic relations and weakens our national security," Cantor said in a statement. "Our allies, especially Poland and the Czech Republic, deserve better and our people deserve smarter and safer."
The new plan would rely sea and land-based sensors and interceptor missiles intended as a bulwark against Iranian short- and medium-range missiles.
The Bush missile shield plan, which never moved beyond the blueprint stage, would have been a deterrent for Iranian long-range missiles, but Russians worried that the system would be aimed at them.
Gates said that the initial stage of Obama's alternate plan would deploy Aegis ships armed with interceptors, giving the military the ability to move the system around.
Another key to the near-term network would be new, more mobile radar used to detect and track short- and medium-range missiles if they were launched from Iran.
In a press conference that followed Obama's remarks, Gates said that a second phase of the plan would add a modified version of a land-based missile that is still being developed. Gates said the U.S. told the Czech Republic and Poland that they would be part of that stage of the system, which won't take place until 2015.
That second stage could result in missiles being placed on land in Eastern Europe, Gates said.
Gates said the decision to abandon the Bush administration's plans came about because of a change in the U.S. perception of the threat posed by Iran. U.S. intelligence decided short- and medium-range missiles from Iran now pose a greater near-term threat than the intercontinental ballistic missiles the Bush plan addressed, he said.
Still, the decision can be read at least in part as an effort to placate Russia at a time when its support against Iran's suspected nuclear program has not been forthcoming and is sorely needed.
Obama faced the dilemma of either setting back the gradual progress toward repairing relations with Russia or disappointing the Czech Republic and Poland, two key NATO allies.
Russian President Dmitry Medvedev is preparing to visit the United States next week for the U.N. General Assembly and the Group of 20 nations economic summit.
The plan for a European shield was a darling of the Bush administration, which reached deals to install 10 interceptors in Poland and a radar system in the Czech Republic - eastern European nations at Russia's doorstep and once under Soviet sway. Moscow argued vehemently that the system would undermine the nuclear deterrent of its vast arsenal.
NATO Secretary-General Anders Fogh Rasmussen called the U.S. decision "a positive step."
And Konstantin Kosachev, head of the foreign affairs committee in the lower house of the Russian parliament, said, "It reflects understanding that any security measure can't be built entirely on the basis of one nation."
Senate Republican Whip Jon Kyl called the decision "dangerous and shortsighted."
"The message the administration sends today is clear: The United States will not stand behind its friends and views 're-setting' relations with Russia more important," said the Arizona senator. "This is wrong!"
Sen. John McCain, who lost to Obama in last year's presidential election, called the decision a disappointment that "has the potential to undermine perceived American leadership in Eastern Europe."
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Associated Press writers Lara Jakes, Matthew Lee, Robert Burns, Pauline Jelinek and Julie Pace in Washington; Karel Janicek in Prague; and Monika Scislowska and Vanessa Gera in Warsaw contributed to this report.
