A statement from the charity today said the decision followed the disclosure that relatives of soldiers killed in Iraq and Afghanistan might have had their phones hacked by a private investigator working for the newspaper.
It said the legion had suspended all relations with the News of the World until the allegations were resolved.
"We can't with any conscience campaign alongside News of the World on behalf of armed forces families while it stands accused of preying on these same families in the lowest depths of their misery," said a legion spokesman. "The hacking allegations have shocked us to the core."
The partnership with the News International-owned newspaper began in April. They were campaigning for the principles of the armed forces covenant to be written into law.
The two organisations were preparing to join forces in another campaign to save the Chief Coroner's Office from being abolished.
"Clearly, it would make a mockery of that campaign to go hand-in-hand with the News of the World," the spokesman added. "We think we'll do better without it."
The charity said its advertising budget with News International was also under review. It advertises its armed forces welfare services in the NOTW stablemate The Sun and the newspaper's online forces site.
Kevin Hart, a Royal British Legion lawyer working with bereaved military families, said he was "appalled that their private lives could have been invaded".
The phone hacking story has also prompted the Japanese car manufacturer Mitsubishi to withdraw its advertising from the News of the World and donate the money it would have spent to the charity ChildLine. The company declined to comment on the size of the donation.