Under the bill, faith-based groups could not be forced to hire or retain an employee whose beliefs run counter to the organization's, while churches and religious schools would have the right to reject holding events for people or groups to whom they object.
Deal, a Republican, said he could not support legislation that drew wide criticism from corporations and had triggered threats of a state boycott by the entertainment industry, including movie and TV studios and prominent actors.
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"I do not think that we have to discriminate against anyone to protect the faith-based community in Georgia," Deal said at news conference on the legislation, noting his religious faith.
Deal's decision was immediately celebrated by gay rights advocates, including the national Human Rights Campaign.
"Our message to Governor Nathan Deal was loud and clear: this deplorable legislation was bad for his constituents, bad for business, and bad for Georgia's future," HRC President Chad Griffin said in a statement.
He added that Deal had "set an example for other elected officials to follow."