Upgraded interceptors were to have been deployed in Poland to counter medium- and intermediate-range missiles, and potential threats from the Middle East.
Mr Hagel said the threat had "matured" and that the US commitment to Nato missile defence remained "ironclad".
The interceptors had been strongly opposed by the Russian government.
It complained that they would be able to stop Russia's intercontinental ballistic missiles (ICBMs) and undermine its nuclear deterrent.
The US has always insisted that the missile shield was intended to protect against attacks by Iran and North Korea.
Analysts said Friday's announcement could open the door to another round of talks between the US and Russia on nuclear arms reductions.
The dropping of the fourth and final phase of the European Phased Adaptive Approach (EPAA) for missile defence was announced quietly at a news conference, reports the BBC's Matt Wells in Washington.
Almost as an aside, Mr Hagel confirmed that in order to fund 14 new Ground-Based Interceptors (GBIs) in Alaska by 2017 to guard against increased threats from North Korea, the SM-3 IIB programme - a land-based standard missile - would be "restructured", our correspondent adds.
"The purpose was to add to the protection of the US homeland already provided by our current GBIs against missile threats from the Middle East," Mr Hagel said.
"The timeline for deploying this programme had been delayed to at least 2022 due to cuts in Congressional funding. Meanwhile, the threat matures.
"By shifting resources from this lagging programme to fund the additional GBIs as well as advanced kill vehicle technology that will improve the performance of the GBI and other versions of the SM-3 interceptor, we will be able to add protection against missiles from Iran sooner while also providing additional protection against the North Korean threat."
Mr Hagel promised that North Atlantic Treaty Organisation (Nato) allies in Europe would see no difference to their level of protection as a result, with the first three phases of the EPAA providing coverage of all of their territory as planned by 2018.
"Let me emphasise the strong and continued commitment of the United States to Nato missile defence. That commitment remains ironclad."
Mr Hagel made no reference to Russia's objections. Officials in Moscow had hinted that they would not consider further nuclear arms cuts if the SM-3 interceptors were deployed.
Our correspondent says defence spending is being squeezed in the US, and the Pentagon believes tough decisions have to be made about where the main threat lies.
"Cancelling phase 4 opens the door to another round of US-Russian nuclear arms reductions,'' Tom Collina, research director at the Arms Control Association, told the Associated Press. "We give up nothing since phase 4 was not panning out anyway. This is a win-win for the United States."
The decision was, however, criticised by Republicans in the Congress.
"President Obama's reverse course decision will cost the American taxpayer more money and upset our allies," said Representative Mike Rogers, who chairs the Strategic Forces Subcommittee of the House Armed Services Committee, which oversees ballistic missile defence.
Although North Korea is many years away from developing an effective inter-continental ballistic missile with nuclear capability, the mood in Washington is that the US needs to stay ahead of the threat posed by an increasingly belligerent regime in Pyongyang, he adds.
Source: BBC News
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