PayPal's move came as another state, Mississippi, signed into law a measure that allows government officials and businesses to deny gay people service if it conflicts with their religious beliefs.
The legislation is part of a series of measures that have been labelled anti-gay that are sweeping southern states.
The North Carolina law, known as HB2, prohibits local governments within the state from enacting policies protecting the LGBT (lesbian, gay, bisexual, transgender) community from discrimination at public facilities and restrooms.
It specifically requires that transgender people use the restroom corresponding to the sex on their birth certificates.
"The new law perpetuates discrimination and it violates the values and principles that are at the core of PayPal's mission and culture," the company said in a statement.
"As a result, PayPal will not move forward with our planned expansion into Charlotte," it said.
PayPal had planned to invest $3.6 million (roughly Rs. 23 crores) in a global operations centre in Charlotte, North Carolina that would have employed more than 400 people.
In a letter to North Carolina's Republican governor, Pat McCrory, nearly 100 representatives of companies such as Apple, Bank of America, Marriott, Starbucks and Facebook warned that the law will "diminish the state's draw as a destination for tourism, new businesses and economic activity."
(Also see: Tech Giants Join Rebuke of US Law Blocking LGBT Rights)
McCrory signed the measure into law on March 23, after it was approved by the state legislature.
The National Basketball Association (NBA) and other sports groups have also warned that they will consider moving events outside of the state, while Hollywood directors and producers have signalled their opposition to film in North Carolina.
New York and San Francisco, meanwhile, have said they will not finance official trips to the state.
Several rights groups, including the influential ACLU, have already challenged the law in court.
Meanwhile, Mississippi's legislation is also opposed by rights groups as well as companies such as Nissan, which employs more than 6,000 people at an assembly plant in the state.
The Mississippi law aims to protect government employees, religious organizations and some businesses that cite religious beliefs as a reason for denying services to same-sex couples that want to marry.
"This bill does not limit any constitutionally protected rights or actions of any citizen of this state under federal or state laws," Mississippi's Republican Governor Phil Bryant said Tuesday.
The law, he said, would "prevent government interference in the lives of the people."
The measures popped up in conservative states after the US Supreme Court legalized gay marriage across the nation in June 2015.
Last week in another southern state, Georgia, Republican Governor Nathan Deal vetoed a similar "religious freedoms" bill that giant corporations, Hollywood and activists complained would infringe gay rights.
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