The decision comes amid falling prices of modems, rising demands on research and development and a shrinking market as more smartphone makers buy modems and processors, which Ericsson does not make, together.
The Swedish company had said it would evaluate the future of the business within 18 to 24 months of taking it on in 2013 when joint venture partner STMicroelectronics pulled out.
Ericsson's chief executive said on Thursday the rapidly changing market meant the company had concluded it would be too expensive for the business to succeed.
"In addition, we believe we can use this money in a better way," Hans Vestberg told Reuters.
The Swedish company said the decision to end the development of modems would mean it could shift resources to developing radio networks.
Ericsson had targeted a top three market position for its modems business, which employs around 1,600 people, alongside U.S. firms Qualcomm and Intel.
The move to stop developing new modems would mean around 1,000 staff leaving Ericsson, Vestberg said.
Some of the other employees would find work at a new research and development unit within Ericsson's core radio networks business that will be set up in Sweden's Lund and employ 500 in total.
Some would also continue working with the M7450 modem which was launched in August, Vestberg said, although it was hard to say for how long Ericsson would go on making it as that would depend on the success of the smartphones in which it sits.
In total, Ericsson employed slightly more than 115,000 at the end of the second quarter.
Ericsson said it expected the move to lead to significant cost savings, without specifying. In the three quarters since the modems business was integrated in Ericsson, it had racked up 1.7 billion Swedish crowns (238 million) in operating losses.
"Modems will have no impact on Group P&L (profit and loss account) from the second half of 2015," it said in a statement.
Ericsson shares were up 2 percent at Swedish 92.60 crowns by 0925 GMT, outperforming the STOXX Europe 600 technology index which was up 0.85 percent.
© Thomson Reuters 2014
Get your daily dose of tech news, reviews, and insights, in under 80 characters on Gadgets 360 Turbo. Connect with fellow tech lovers on our Forum. Follow us on X, Facebook, WhatsApp, Threads and Google News for instant updates. Catch all the action on our YouTube channel.