Residents on Raasay were angered after civil servants awarded the lease to a stalking partnership instead of crofters who had held the rights for 18 years.
But now the Scottish Government is paying South Ayrshire Stalking £9000 to give up the lease without shooting a single stag.
Alex Salmond announced the U-turn at Holyrood yesterday, saying the contract had now been "withdrawn by mutual consent".
Raasay Crofters Association secretary Anne Gillies received a phone call earlier from Environment Minister Paul Wheelhouse to inform islanders of the decision.
The minister will visit Raasay today when he will meet crofters and hold talks with community leaders about taking over 711 acres of Forestry Commission woodland which is coming up for sale.
Mrs Gillies said: "We welcome the lease being restored in the short term and look forward to positive discussions with Mr Wheelhouse and anybody else about what happens to the lease after November 2013.
"I think the intention is to consult the community rather than the crofters exclusively. It is important to us that these sporting rights remain in local control."
The original decision was widely condemned, including an unexpected intervention from local Free Church of Scotland ministers.
Many recalled the 1960s and 1970s when the Scottish Office sold Raasay properties over the heads of islanders to an absentee landlord who visited the island only twice, briefly, in 20 years.
SNP ministers are known to have been furious that comparisons were being drawn to that episode, which prompted yesterday's developments.
Mr Wheelhouse said: "Raasay is a fragile island community and ministers recognise the sporting rights are very important to the islanders.
"I share the concerns expressed locally about the way in which the contract was awarded and will ensure, as I have indicated previously, that in future appropriate ministerial consideration is given when such decisions are being made.
"I would like to thank Chris Dalton and South Ayrshire Stalking for their understanding and agreement to withdraw from the contract."
However, land reform campaigner Andy Wightman pointed out the acceptance of the highest bid was originally defended by ministers on the basis of best value. He added: "So what ministerial rules justify the payment of £9000 to the tenant to buy them out?"
He suggested the rural affairs committee should conduct a short inquiry into exactly how this decision was taken.
Scottish Crofting Federation chairman Derek Flyn said he was delighted ministers had "accepted a serious error was made. We are sure lessons will be learned from this and that decisions of such gravity, affecting remote and fragile communities, will in future be taken at ministerial level".
David Cameron, chairman of Community Land Scotland, said: "It will now be for Scottish ministers to get the word round every department of government that they favour community empowerment as a means to drive sustainable economic development and that they never want to see a repeat of this episode."
A Free Church of Scotland spokesman also welcomed the Scottish Government acting on the concerns of rural people.
Mr Dalton, who runs South Ayrshire Stalking, said: "We were not aware we were bidding against the crofters when we tendered for these sporting rights in good faith. However, because of the strength of feeling expressed we feel it is now appropriate to withdraw from the contract."
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