The head of the UN Stabilisation Mission in Syria (UNSMIS) says the operation has been suspended because of escalating violence.
Norwegian Gen Robert Mood said the observers would cease patrols and stay in their current locations.
But he said the mission remained committed to ending the violence.
The announcement comes a day after Gen Mood warned that the escalation in violence was limiting the observers' ability to do their work.
Activists reported at least 60 people killed around the country, with the worst violence in areas around Damascus, where they said 10 people were summarily killed in the town of Saqba.
At least seven people were killed overnight in Douma, an eastern suburb of the capital Damascus, while at least 18 others died in violence elsewhere, the UK-based Syrian Observatory for Human Rights reported.
The opposition Syrian National Council also warned of a looming massacre in Homs which it says is besieged by 30,000 troops and pro-regime militiamen.
The government meanwhile said funerals were held for 27 military personnel killed in earlier fighting.
Later Syrian state TV reported the killing of Walid Ahmad al-Ayesh, whom it described as the leader of the al-Nusra Front.
Al-Nusra is a shadowy radical Islamist group with suspected al-Qaeda links which has said it has carried out several suicide bombings around the country.
Syria restricts access to foreign media, and reports of killings are difficult to verify.
In a statement announcing the suspension of UNSMIS operations, Gen Mood said: "The observers will not be conducting patrols and will stay in their locations until further notice."
"This suspension will be reviewed on a daily basis. Operations will resume when we see the situation fit for us to carry out our mandated activities," he said, adding that a "return to normal operations remains our objective".
Gen Mood said that violence had intensified in the last 10 days.
"The lack of willingness by the parties to seek a peaceful transition, and the push towards advancing military positions is increasing the losses on both sides: innocent civilians, men, women and children are being killed every day," he said.
"It is also posing significant risks to our observers."
In response to the announcement, Burhan Ghalioun, former head of the opposition Syrian National Council, said UN and Arab League envoy Kofi Annan's six-point peace plan could still be salvaged.
"I think there is a possibility of saving it by getting the UN Security Council to vote on a resolution invoking Chapter 7, requesting a mandate for the threat of force," he said.
"This could play a role in convincing the Syrian regime to fulfil and respect its commitments."
However, the Council remains split, with Russia and China deeply opposed to even the possibility of the use of force.
US White House spokesman Tommy Vietor urged Syria to abide by the Annan plan.
"At this critical juncture, we are consulting with our international partners regarding next steps toward a Syrian-led political transition as called for in Security Council resolutions," he said.
Arab League spokesman Ahmad Bin Hilli told the BBC the decision was a temporary one, and the operation could only be cancelled by the UN in consultation with the Arab League.
The mission's 298 military observers and 112 civilian staff are in Syria to verify the implementation of Mr Annan's plan, which included a ceasefire.
Last Tuesday UN monitors were fired on and turned away by angry residents as they tried to enter the town of Haffa amid fears of a massacre. They were able to return on Friday.
The UN says at least 10,000 people have died since pro-democracy protests began in March 2011. In April, the Syrian government reported that 6,143 Syrian citizens had been killed by "terrorist groups".