The initial decision made by Tesla in March to accept bitcoin caused an outcry from environmentalists.
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Tesla has suspended vehicle purchases using bitcoin due to climate change concerns, its CEO Elon Musk said in a tweet.
Bitcoin fell by more than 10% after the tweet, while Tesla shares also dipped.
Tesla’s announcement in March that it would accept the cryptocurrency was met with an outcry from some environmentalists and investors.
The electric carmaker had in February revealed it had bought $1.5bn (£1bn) of the world’s biggest digital currency.
But on Thursday, it backtracked on its previous comments.
“We are concerned about rapidly increasing use of fossil fuels for Bitcoin mining and transactions, especially coal, which has the worst emissions of any fuel,” Mr Musk wrote.
“Cryptocurrency is a good idea… but this cannot come at great cost to the environment.”
He also said the electric carmaker would not sell any of its bitcoin, and intends to use it for transactions as soon as mining shifts to using more sustainable energy.
Market analysts see the move as an attempt by Tesla to assuage the concerns of investors who are focused on climate change and sustainability.
“Environmental, Social and Corporate Governance (ESG) issues are now a major motivation for many investors. Tesla, being a clean energy-focussed company, might want to work better in the environmental area of ESG,” Julia Lee from Burman Invest told the BBC.
“But a cynic might suggest that this is just another move by Elon Musk to influence the cryptocurrency market, as he has done on so many other occasions,” she added.
Last month, Tesla announced profits for the first three months of the year were $438m, up from $16m last year, boosted by sales of bitcoin and environmental credits.
Mr Musk has been one of the world’s most high profile proponents of cryptocurrencies, often tweeting about bitcoin and the once-obscure digital currency dogecoin.
His tweets in recent months helped to turn dogecoin, which was started as a social media joke, into the world’s fourth-biggest cryptocurrency.
Bitcoin is created by miners using high-powered computers to compete against each other to solve complex mathematical puzzles.
It is an energy-intensive process that often relies on electricity generated with fossil fuels, particularly coal.
The dominance of Chinese bitcoin miners and lack of motivation to switch from cheap fossil fuels to more expensive renewable energy sources could mean there are few quick solutions to the emissions concerns over bitcoin.
China accounts for more than 75% of bitcoin mining around the world, according to recent research.
The cryptocurrency’s carbon footprint is as large as one of China’s ten largest cities, the study found.
That is because those bitcoin miners tend to use electricity produced with fossil fuels, primarily coal, for most of the year, only shifting to renewable energy, mostly hydropower, during the rainy summer months.
Supporters of bitcoin point out that the mainstream financial system, with its millions of workers and computers in air-conditioned offices, also uses large amounts of electricity, which is usually produced with fossil fuels.
Reporting by the BBC’s Peter Hoskins