The company was hoping to serve food from its Stamford branch until 1am on weekends and midnight on weekdays, incensing people living in the Ryhall Road area.
Neighbours say they are already having to put up with loud music, shouting and revving engines from the car park and began to protest against the planned new opening hours.
But on Wednesday the firm told the Mercury it was pulling the planning application it had lodged with South Kesteven District Council.
McDonalds franchisee Matthew Jarrett who owns and runs the restaurant said: "As a responsible local businessman I and my staff recognise that we need to be a good neighbour 24 hours a day, irrespective of when we are open.
"I have liaised with the residents association and listened to their concerns, and as a result we have chosen to withdraw our application while we work together with the community.
"In the meantime we have put up notices for customers to kindly respect the privacy of the local residents, and are supervising the situation through our managers logging any anti-social behaviour."
His decision was welcomed by residents and councillors.
Pensioners living in the sheltered housing complex in Edmunds Close were objecting strongly to the plans.
One, John Butcher, said: "I am very pleased to know that they have withdrawn the application. It is a tremendous relief to the people in Edmunds Close.
"People power has won the day."
Stamford town councillor John Binder (Lib Dem), said residents were worried about anti-social behaviour and policing if the plans went ahead.
He had also received and helped to organise a 122-signature petition.
Coun Binder, who lives in Ryhall Road, said: "I think it is great. It will put people's minds at rest in Edmunds Court at least."
The application was due to be considered by the district council's development control committee on Tuesday, after a decision was deferred from a March meeting. Councillors then had said they were likely to go against officers' advice and refuse permission.
McDonalds had applied to open from 5am until: midnight on Mondays to Thursdays, 1am on Fridays and Saturdays and 10pm on Sundays. The opening hours will remain at: 6am to 11pm Mondays to Saturdays, and 6am to 10pm Sundays and bank holidays.