Yoon earlier declared martial law in a late night address broadcast on YTN television, claiming he would eradicate "shameless pro-North Korean anti-state forces".
After the parliament's 190-0 vote to lift the declaration, the National Assembly Speaker Woo Won Shik declaring that MPs "will protect democracy with the people".
Soldiers attempted to enter the parliament in Seoul after the president's martial law declaration. (AP PHOTO)
Woo called for police and military personnel to withdraw from the Assembly's grounds.
Live television footage showed troops apparently tasked with imposing martial law attempting to enter the assembly building, and parliamentary aides were seen trying to push the soldiers back by spraying fire extinguishers.
Yoon said on Tuesday night that opposition parties had taken the parliamentary process hostage.
He vowed to eradicate "shameless pro-North Korean anti-state forces" and said he had no choice but to take the measure to safeguard constitutional order.
"I declare martial law to protect the free Republic of Korea from the threat of North Korean communist forces, to eradicate the despicable pro-North Korean anti-state forces that are plundering the freedom and happiness of our people and to protect the free constitutional order," Yoon said.
Shortly after Yoon made his announcement, people began gathering outside the parliament building, some of them shouting: "Withdraw emergency martial law!".
The military said activities by parliament and political parties would be banned and that media and publishers would be under the control of the martial law command.
Yoon did not cite any specific threat from the nuclear-armed North, instead focusing on his domestic political opponents.
It is the first time since 1980 that martial law has been declared in South Korea.
The Korean won was down sharply against the US dollar.
A central bank official said it was preparing measures to stabilise the market if needed.
Yoon said he had no choice but to resort to such a measure in order to safeguard free and constitutional order, saying opposition parties have taken hostage of the parliamentary process to throw the country into a crisis.
President Yoon Suk-yeol said in a televised speech that martial law was necessary. (AP PHOTO)
Yonhap reported that the entrance to the parliament building was blocked.
"Tanks, armoured personnel carriers and soldiers with guns and knives will rule the country," Lee Jae-myung, leader of the opposition Democratic Party, said in a live-stream online.
"The economy of the Republic of Korea will collapse irretrievably. My fellow citizens, please come to the National Assembly."
Yoon cited a motion by the Democratic Party, which has a majority in parliament, this week to impeach some of the country's top prosecutors and its rejection of a government budget proposal.
South Korea's ministers on Monday protested the move by the opposition last week to slash more than 4 trillion won ($A4.3 trillion) from the government's budget proposal.
Yoon said that action undermines the essential functioning of government administration.
Han Dong-hoon, the chief of Yoon's own People Power Party, said the president's declaration of martial law was "wrong" and that he would "block it" together with the people.
Yoon - whose approval rating in polls has dipped in recent months - has struggled to push his agenda against an opposition-controlled parliament since taking office in 2022.
The White House did not immediately respond to a request for comment.
About 28,500 US troops are stationed in South Korea.
A spokesman for the US military command did not answer repeated phone calls.
with AP and Yonhap
