Najib, who said he would abolish the 1948 law as part of wider political reforms, told members of his ruling United Malays National Organisation party that he had decided to keep the law after consultations with "party leaders, including my deputy, vice-presidents, NGOs and the grassroots".
Human rights and political activists say the Sedition Act has been used by the ruling party to stifle political dissent and cement its dominant position since Malaysia became independent.
The law criminalizes speech that could bring hatred or contempt or disaffection against the government. Conviction carries a penalty of up to three years imprisonment or a fine of $1 600 or both.
Najib said the law will not only be retained but will also be strengthened.
"There will be a special clause to protect the sanctity of Islam, while other religions also cannot be insulted", he said.
Prosecutors have filed charges under the act against 14 political activists and members of the opposition since August, Suaram said, and nine more are being investigated, including a journalist.