The 11th U.S. Circuit Court of Appeals issued the order after the Justice Department challenged what is considered the toughest immigration law in the nation. The opinion also blocked a part of the law that makes it a crime for immigrants to not have proper documentation.
A final decision on the law won't be made for months to allow time for more arguments.
Since a federal judge upheld much of the law in late September, many frightened Hispanics have been driven away from Alabama, fearing they could be arrested or targeted by police. Construction workers, landscapers and field hands have stopped showing up for work, and large numbers of Hispanic students have been absent from public schools.
To cope with the labor shortage, Alabama agriculture commissioner John McMillan at one point suggested farmers should consider hiring inmates in the state's work-release program.
It's not clear exactly how many Hispanics have fled the state. Earlier this week, many skipped work to protest the law, shuttering or scaling back operations at chicken plants, Mexican restaurants and other businesses.
Immigration has become a hot-button issue in Alabama over the past decade as the Hispanic population has grown by 145 percent to about 185,600 people, most of them of Mexican origin. The Hispanic population represents about 4 percent of the state's 4.7 million people, but some counties in north Alabama have large Spanish-speaking communities and schools where most of the students are Hispanic.
In addition to the Obama administration, a coalition of advocacy groups also filed a separate appeal of the law, claiming it has thrown Alabama into "chaos."
Alabama's law was considered by both opponents and supporters to be stricter than similar laws enacted in Arizona, Utah, Indiana and Georgia. Federal judges in those states have blocked all or parts of those measures.
Arizona Gov. Jan Brewer earlier this year asked the U.S. Supreme Court to resolve the legal fight over her state's tough immigration law.
The Justice Department has called the Alabama law a "sweeping new state regime" and urged the appeals court to forbid states from creating a patchwork of immigration policies. The agency also said the law could strain diplomatic relations with Latin American countries, who have warned the law could impact millions of workers, tourists and students in the U.S.
The law, it said, turns illegal immigrants into a "unique class who cannot lawfully obtain housing, enforce a contract, or send their children to school without fear that enrollment will be used as a tool to seek to detain and remove them and their family members."
"Other states and their citizens are poorly served by the Alabama policy, which seeks to drive aliens from Alabama rather than achieve cooperation with the federal government to resolve a national problem," the attorneys have said in court documents.
State Republicans have long sought to clamp down on illegal immigration and passed the law earlier this year after gaining control of the Legislature for the first time since Reconstruction. Alabama Gov. Robert Bentley signed the measure, saying it was crucial to protect the jobs of legal residents amid the tough economy and high unemployment.