The Rail, Maritime and Transport (RMT) union announced the decision after what it described as progress in talks with Serco NorthLink Ferries.
It is in dispute over new flexible working patterns. The firm proposed cutting the level of crew during the quieter winter months.
The first of three planned 24-hour walkouts on Friday saw ferry services connecting Orkney to Scrabster across the Pentland Firth cancelled.
A second wave of action, due to take place yesterday, was averted after significant progress in discussions.
RMT general secretary Bob Crow said: "Our members' support in this campaign was clearly demonstrated on Friday by the stoppage on the NorthLink ships.
"However, we have kept a dialogue going with the company and our members are also conscious of the effect that the action is having on island communities and in particular at this time of the year.
"We have now been able to make significant progress in discussions with Serco. We have asked the company for a number of assurances which have been met and in an effort to make progress and as a gesture of goodwill to the island communities we have agreed to a suspension of all action to allow further discussions to take place.
"If we can't make sufficient progress in those talks we will have no hesitation in issuing notice of our intent to take action again immediately."
Stuart Garrett, managing director at Serco NorthLink, said: "We are pleased the RMT has chosen to suspend industrial action and our passengers and freight customers can use services as intended.
"Serco NorthLink made clear our intention to streamline the services in order to generate efficiencies when we took over the northern isles ferry services and stated to the unions last month that there would not be any compulsory redundancies.
"We sincerely hope that discussion with the union over the coming days will mean further disruption to these lifeline services over the festive season is averted."
The Liberal Democrat MSP for Shetland, Tavish Scott, said: "This shipping strike should not have happened. Islanders need their lifeline service. Local businesses need to export and imports for Shetland and the oil industry are essential for the economy - Shetland has no alternative shipping service so a strike should never be undertaken lightly.
The LibDem MSP for Orkney, Liam McArthur, added: "Whatever issues remain to be resolved between Serco Northlink and the unions can now be settled through dialogue."
Transport Minister Keith Brown welcomed the news and reiterated that the dispute must be ended quickly to avoid disruption to island communities.
However, rail travellers still face uncertainty, with talks between RMT and train operator ScotRail said to have broken down over the weekend.
The dismissal of ticket examiner Scott Lewis for gross misconduct triggered a strike announcement by the RMT last Thursday with two 24-hour walkouts by ScotRail staff planned on December 22 and Christmas Eve. ScotRail's contingency plans will be announced this week.
Further disruption is threatened with a 24-hour strike on CrossCountry trains, which connect Glasgow, Edinburgh and Aberdeen to England via the East Coast Main Line, scheduled for Friday after what RMT says is a "comprehensive breakdown in industrial relations". Talks are scheduled for tomorrow.
In addition, a dispute which has led to a series of 24-hour actions by Network Rail signallers in Stirling over shift patterns is ongoing.