Former BBC talkshow host Robert Kilroy-Silk will not face criminal charges over his attack on Arabs, the Crown Prosecution Service says.
Mr Kilroy-Silk was elected an MEP in June elections
Mr Kilroy-Silk called Arabs "suicide bombers" and "limb-amputators" in an article in the Sunday Express.
He resigned after the BBC suspended his show, Kilroy, when the remarks appeared on 4 January.
Muslim groups have angrily described the decision as "incomprehensible".
Police investigated Mr Kilroy-Silk's comments after a complaint by the Commission for Racial Equality.
However, the CPS said on Thursday that it had advised the Metropolitan Police the article did not constitute an offence under the Public Order Act.
A CPS spokesman said that for in order to succeed in any prosecution under
Section 18 of the Public Order Act prosecutors would have to demonstrate that Mr Kilroy-Silk, now a UK Independence Party MEP, intended to stir up racial hatred or that his action was likely to stir up racial hatred.
The CPS said that although the article was insulting and abusive to Arab people, it could not be described as threatening under the act.
Iqbal Sacranie, secretary-general of the Muslim Council of Britain, said the decision was "incomprehensible". He demanded the Director of Public Prosecutions, Ken MacDonald QC, review the case.
"The CPS has failed to protect Arabs and British Muslims," he said.
"This was an opportunity for the CPS to show that racist remarks about Arabs are every bit as intolerable as racist remarks about Jews or any other racial grouping.
"The CPS has sadly failed this crucial litmus test and its decision will regrettably give comfort to bigots and xenophobes."
Ahmed Versi, editor of The Muslim News, said he was disappointed.
"If the same comments made against Arabs were made against Jews, I'm quite sure he would have been prosecuted," he said.
Mr Kilroy-Silk had argued that he had a right to say "there are Arab states that are evil, despotic and treat women abominably".
Throughout the furore, he insisted he was not racist and that his talkshow had done a lot to promote equality.
Sue Taylor, head of division for the CPS casework directorate, said she acknowledged many people found the article shocking, abusive and deeply insulting.
"We took their concerns very seriously and spent some time considering in-depth whether the article committed a criminal offence," she said.
"We are constrained by law as to what we can and cannot prosecute and in this case we have had to advise the police that a criminal offence has not been committed."
But Mr Sacranie said the CPS's reasoning for dropping the case failed to take into account that the January 2004 article had talked about "Arabs" rather than "Arab regimes".
"This was generalisation of the worst kind and in our opinion tantamount to incitement to racial hatred," he said.
A spokesman for Scotland Yard said it would not be taking any further action, based on the advice from the CPS.