Both sides were due back in court later today in the ongoing battle
The FBI says it may have found a way to break into an iPhone used by one of the San Bernardino attackers, without the help of tech giant Apple.
Apple has refused to unlock the phone, thought to contain evidence relating to the massacre, resulting in a fierce legal battle between the two sides.
A highly anticipated hearing over whether Apple should be forced to comply has been cancelled in light of the FBI's surprise announcement.
In a filing late on Monday, federal prosecutors said "an outside party" had come forward over the weekend with a possible method for unlocking Syed Rizwan Farook's encrypted phone.
If viable, "it should eliminate the need for the assistance from Apple", according to the filing.
US Justice Department spokeswoman Melanie Newman said the government was "cautiously optimistic" that the possible method will work.
The US government has obtained a court order requiring Apple to write new software to disable passcode protectors, which they can use on the phone.
But Apple is fighting the order, warning that the software could fall into the hands of hackers and threaten the security of all encrypted devices.
It says the demand violates its Constitutional rights, harms its brand and threatens the trust of its customers to protect their privacy.
Numerous tech giants including Google, Facebook, Microsoft and Yahoo, have publicly backed Apple alongside civil liberties groups and privacy advocates.
Farook and his wife Tashfeen Malik murdered 14 people and wounded 22 others in San Bernardino, California, in December.
They were killed hours later in a gun battle with police. It was the deadliest terror attack in the US since 9/11.
Yesterday, Apple CEO Tim Cook addressed an audience, declaring the company would not “shrink from its responsibility” in protecting its customers and their privacy.