The decision comes amid strain between the allies after NC denied Congress a Rajya Sabha seat; polls for four Upper House seats are due October 24.
NC vice-president Omar Abdullah said the party was open to supporting Congress if it had a stronger candidate for Nagrota.
The BJP has fielded Devyani Rana, daughter of late MLA Devender Singh Rana, who had won the seat in 2024 by a record margin.
The Congress has decided not to contest the Nagrota assembly by-election in Jammu and Kashmir, even though the National Conference has offered it the seat.
Both the coalition partners had fought last year's assembly elections together but the alliance has been going through a rough patch ever since the National Conference (NC) refused a safe seat to the Congress for the Rajya Sabha elections. Elections to the four Rajya Sabha seats in the Union Territory will be held on October 24.
Bypolls are scheduled for Nagrota and Budgam assembly segments on November 11.
A by-election was necessitated in Nagrota by the demise of BJP legislator Devender Singh Rana on October 31 last year, while the Budgam seat fell vacant after Chief Minister Omar Abdullah retained Ganderbal -- his family's bastion -- after winning the two assembly seats.
"The Indian National Congress has decided to leave the Nagrota assembly seat to its ally National Conference, keeping in view the larger interests and goals of defeating the BJP," Jammu and Kashmir Pradesh Congress Committee (JKPCC) chief spokesperson Ravinder Sharma said in a statement.
Downplaying rift with the Congress over seat-sharing in Rajya Sabha elections, NC vice-president and Chief Minister Omar Abdullah on Thursday said that "if the Congress has a better candidate for Nagrota, we are ready to compromise (by supporting Congress and not fight the election). We have no objection".
Sharma said the decision follows detailed deliberations over a JKPCC report and also after considering various factors, including that the NC had emerged second in Nagrota in 2024 assembly elections.
"Taking into account the broader parameters and principles of coalition, the INC central leadership has decided to leave the (Nagrota) seat to its ally NC, in furtherance of larger interests and goals of defeating the BJP," Sharma said.
On Sunday, the NC announced senior party leader Agha Syed Mehmood as its candidate for Budgam.
Monday is the last date to file nominations. The scrutiny of applications will be done by October 22 and the last date for withdrawal of candidatures is on October 24.
The BJP has fielded Devyani Rana, daughter of Devender Singh Rana, from Nagrota. Devyani, along with JKNPP-I president Harsh Dev Singh, filed their nomination papers from the constituency on Saturday.
Devender Singh Rana had won the seat in 2024 assembly elections by a record margin of 30,472 votes, defeating his nearest NC candidate Joginder Singh who had got 17,641 votes. Congress candidate Balbir Singh was pushed to the third position with 5,979 votes.
Rana had won the seat in the 2014 elections on NC ticket, but later switched to BJP in 2021.
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