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The New York congresswoman is just the second Trump cabinet pick not to go through, after Matt Gaetz pulled out of the running to be attorney general following allegations of sexual misconduct.
Stefanik is a vocal Trump ally and pro-Israel stalwart.
"With a very tight Majority, I don't want to take a chance on anyone else running for Elise's seat" in the House of Representatives, Trump said on his Truth Social platform.
Trump said it was "essential that we maintain EVERY Republican Seat in Congress."
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"The people love Elise and, with her, we have nothing to worry about come Election Day. There are others that can do a good job at the United Nations," he added.
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The president said he had asked Stefanik to stay in Congress and "rejoin the House leadership team," although he did not say in what capacity.
Republicans won both the House and Senate in the November 2024 election that returned Trump to the White House, but they have a very tight lead in the lower chamber.
They control the House by 218 seats to 213, giving them just a tiny margin and making it difficult to pass key legislation.
Two crucial special elections will be held in Florida on April 1 to fill the seats vacated by Mike Waltz, who is now Trump's national security advisor, and Gaetz.
While both Republicans comfortably won the seats in November, polling in one of the districts has shown the Democratic candidate closing the gap considerably.
Trump himself has leaned into the races, with an appearance Thursday at a candidate's online event seen as evidence that Republicans are worried.
Those concerns were further heightened on Tuesday, when a special election for Pennsylvania's state senate saw Democrats flip a district that Trump won handily last year.
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Firebrand
Stefanik has effectively been in limbo since Trump's nomination, keeping her place in the House for a number of key votes.A firebrand who was considered a moderate before the Trump era, Stefanik is seen as one of the most vocal supporters in Congress of both Israel and US Jewish causes.
In January, she railed against "anti-Semitic rot" in the United Nations as she was grilled by senators at her confirmation hearing.
She also called for UN reform to ensure US tax dollars were not "propping up entities that are counter to American interests, anti-Semitic, or engaging in fraud, corruption or terrorism."
During that hearing, Stefanik noted that she voted to defund UNRWA, the UN agency for Palestinian refugees.
Former president Joe Biden halted its US funding over allegations that members were possibly involved in the October 7 Hamas attacks.
Stefanik also revealed that she agreed with far-right Israeli ministers who believe Israel has a "biblical right to the entire West Bank" -- but avoided being pinned down on whether she supported Palestinian self-determination.
