FedEx confirmed the decision after a report in The Wall Street Journal on Monday. The news sent FedEx shares down as much as 1.1%.
"While this decision affects a very small number of shippers, it limits the options for those small businesses on some of the highest demand shipping days in history, and may compromise their ability to meet customer demands and manage their businesses," a FedEx spokesperson said in a statement to CNBC. "FedEx Ground stands ready to support our customers and will continue to deliver record-breaking volume this holiday season."
Amazon declined to comment. Amazon said it sent a message out to sellers on Sunday, telling them it is temporarily restricting FedEx's ground and home delivery services for Prime orders. The company said sellers can still use FedEx's Express shipping service for Prime orders, or FedEx's ground and home delivery services for standard orders.
Amazon added that it was halting the service to make sure FedEx is able to manage cutoffs for delivery by Christmas and so that customers are able to receive their packages on time.
The move comes after FedEx in August announced it would end its ground-delivery contract with Amazon, after halting its express U.S. shipping contract with Amazon in June. At the time, a FedEx spokesperson told CNBC that the change was part of the company's efforts to "focus on the broader e-commerce market."
Amazon, for its part, has been ramping up efforts to launch its own delivery network. In May, CEO Jeff Bezos broke ground on a new $1.5 billion air hub in Kentucky that's scheduled to open in 2021. The air hub, which will house 50 aircraft, is expected to further reduce Amazon's reliance on FedEx, UPS and the U.S. Postal Service.
The company also announced a Delivery Service Partners program in June that allows entrepreneurs to establish local delivery networks and transport packages from warehouses to their final destination. Earlier in June, Amazon debuted a new delivery drone that's intended to speed up delivery times for Prime members.
The Wall Street Journal reported that the ban on FedEx's ground-delivery services begins this week and is expected to continue "until the delivery performance of these ship methods improves," according to an email sent to sellers viewed by the Journal.
Third-party merchants now account for 58% of Amazon's total merchandise sold. Sellers offer products, new and used, from all over the world that they purchase from official distributors, flea markets and clearance aisles.
— CNBC's Steve Kopack contributed to this report.