The Southern Transitional Council (STC) said in a statement that it had sent a letter to the Saudi authorities confirming "the suspension of its participation in the ongoing consultations to implement the agreement."
The Riyadh Agreement which was struck late last year was designed to mend a rift between allies in the Saudi-led war against Yemen.
The on-again, off-again process saw the STC proclaim self-governance in the south in April, only to abandon that stance last month and pledge to implement the stalled peace deal.
The separatists said Wednesday that their decision to pull out of the talks was due to ongoing military escalation in the flashpoint province of Abyan, and the rupture of an agreed ceasefire, AFP reported.
They also complained about the failure to pay public sector salaries, and a collapse of services in the south -- a bugbear that helped trigger the declaration of self-rule in April.
The STC's Vice President Hani Ben Brik said in a tweet that the separatists were committed to the original agreement but that their move was aimed at pushing for a full commitment to the deal.
There was no immediate reaction from the Saudi government.
The separatists said they came back to the Riyadh Agreement in late July under pressure from United Arab Emirates and Saudi Arabia, which had proposed a plan to "accelerate" the power-sharing process.