Salleh Said Keruak, communications and multimedia minister, said that his ministry received numerous complaints over the steamy lyrics of the reggaeton beat song that has won international popularity.
"Despacito will not be aired by the government-owned broadcast stations because we received public complaints. The lyrics are not suitable to be heard," he said.
Salleh said he hoped private television and radio stations would follow suit.
"For Malaysian private stations, we encourage them to practise self-censorship," he added.
"Despacito" -- a racy track full of sexual innuendo which features Puerto Rican rapper Daddy Yankee -- went viral soon after its release in January, and found an even wider audience in April when pop celebrity Justin Bieber sang in a remix.
The song by Puerto Rican singer Luis Fonsi has been named the most streamed song of all time worldwide, and is also popular in Malaysia.
The Southeast Asian country has strict censorship laws, and has in the past banned songs with foul language and cut or axed films deemed too sexy or dealing with sensitive issues.
Earlier the opposition Islamic party, Parti Amanah Negara, urged the government to ban the Spanish song over its "sexy" lyrics.
Atriza Umar, chairperson of its women's wing, described the music as "porn" and unsuitable for young children, warning the song could destroy the moral fabric of the society.
"I regret that these problematic songs are not censored by the ministries," she said in a statement on Wednesday.
"I urge the authorities to ban this song and other songs that contain sexy and violent lyrics which are not suitable in accordance with Islam and our eastern culture," Atriza added.
But minister Salleh admitted that in the modern era, fans will still be able to download and listen to the song on other platforms.
