The pavilion, in Kensington Gardens, London, will now be designed by Icelandic artist Ólafur Elíasson in collaboration with Norwegian architect Kjetil Thorsen of Snøhetta.
In a statement, the gallery said: 'The realisation of Frei Otto's proposal for the 2007 Serpentine Pavilion has been postponed until next year.
'The gallery needs more time to research and develop the architect's pioneering structure and this is not possible during the current year's tight planning schedule.
'The postponement is at the request of the Serpentine and the gallery is grateful to Frei Otto for agreeing to this change.'
In a further twist, Arup deputy chairman Cecil Balmond is back on board and will be working on the pavilion, despite being ruled out of the development last week (Balmond will not work on Serpentine Pavilion).
Serpentine director Julia Peyton-Jones said: 'The Serpentine Gallery architectural commission is taking a step into the future by expanding the design team to include a visual artist - a format which began last year with a collaboration between pavilion designers Rem Koolhaas, Cecil Balmond and Thomas Demand.
'This will bring an extra dimension to the project that already holds a unique place in the innovation of architectural practice.'
RIBA Gold Medal-winner Otto, 81, made his name with pioneering lightweight tent structures, and the German architect/engineer had been expected to work with an artist collaborator on the Serpentine project.
Instead, Elíasson and Thorsen will be delighted to take up the reins, as they become the latest addition to a list of Serpentine designers which includes Oscar Niemeyer, Zaha Hadid and Toyo Ito.
Thorsen said: 'Our collaboration on the Serpentine Pavilion is defined by our mutual focus on the experience of space and on temporality as a constitutive element of spaces, private or public.'
This is not the first time a Serpentine Pavilion architect has dropped out of the project during the design stage. Back in 2005, Dutch firm MVRDV was replaced by lvaro Siza and Eduardo Souto de Moura after its plans to build a 23m-high grass 'mountain' were postponed.