South Korea's ruling party has backed down on a controversial bill to impose tougher penalties for the publication of false information, after critics at home and abroad labelled it a move to stifle a free press and critical coverage.

Rather than put its proposed "fake news" bill to a vote this week, President Moon Jae-in's liberal Democratic Party agreed late on Wednesday to create a joint panel with opposition lawmakers to study options on how to amend existing legislation.

The review will also explore how to deal with the spread of false information on social media, such as Facebook and YouTube, which is covered by a separate law.