Mr Green said his actions had embarrassed the government
Tory MP Damian Green, who was arrested as part of an inquiry over Home Office leaks, will not face charges.
There was "insufficient evidence" to bring a court case against the shadow immigration minister, the Crown Prosecution Service said.
Mr Green, arrested last November, said he was "very pleased" at the decision, calling the government "authoritarian".
But Home Secretary Jacqui Smith said it would have been "irresponsible" for the police not to have taken action.
She announced the police inspectorate would conduct a review of the "operational aspects" of the inquiry but the Home Office said it was too early to say what its scope would be.
Sources have indicated that the Home Office is far from satisfied over the decision not to charge Mr Green, but Northern Ireland Secretary Shaun Woodward said: "What matters now is to move on."
Mr Green - MP for Ashford - and Home Office worker Christopher Galley, who passed on the information, have always denied any wrongdoing over the leaks, forwarded to the press, which related to immigration and crime.
Mr Galley will not face prosecution either, the CPS said.
'Out of touch'
Mr Green, speaking outside Parliament, said: "I'm obviously very pleased with the director of public prosecutions' decision this morning."
He added: "This has been an extraordinary period. One of my jobs as Conservative immigration spokesman is to expose the many failings of the government's immigration policy.
"That's precisely what I was doing in this case and that's why ministers were so embarrassed.
"That has led to the first arrest of an opposition politician for doing his job since Britain became a democracy.
"I cannot think of a better symbol of an out-of-touch, authoritarian, failing government that has been in power much too long."
Mr Green told the BBC the last five months had been "pretty tough", saying: "From the moment I was arrested I thought 'This is not just an outrage; it's completely absurd'. Nothing I have ever done has been improper."
Director of Public Prosecutions Keir Starmer was asked to look at claims that Mr Galley had committed misconduct in public office and that Mr Green had aided, abetted, counselled or procured such an offence.
In his statement, he said there was a "high threshold before criminal proceedings can properly be brought", and that he had considered the "freedom of the press to publish information and ideas on matters of public interest".
He added: "I have concluded that the information leaked was not secret information or information affecting national security."
There was "insufficient evidence for a realistic prospect of conviction against Mr Galley or Mr Green".
But Mr Starmer also said there was "evidence upon which a jury might find that there was damage to the proper functioning of the Home Office" which "should not be underestimated".
He said he had taken press freedom into account and that it had to be "recognised that some damage to the proper functioning of public institutions is almost inevitable in every case where restricted and/or confidential information is leaked".
Ms Smith told the BBC: "My job is to protect the British people and the sensitive information about them, which is what we have done."
She said senior Tories had been "bragging" about the details they had access to.
But the Liberal Democrats have called for a full parliamentary inquiry into the affair.
Home affairs spokesman Chris Huhne called the police investigation a "monumental shambles" and said: "Clearly the civil servants involved here have confused national security with their own embarrassment."
Mr Green has always said he was releasing information the information conveyed to him in the public interest.
His arrest followed a series of leaks:
• In November 2007 a series of Home Office memos was published showing that Home Secretary Jacqui Smith had been warned four months earlier that thousands of illegal immigrants had been cleared to work in sensitive Whitehall security jobs.
• In February last year, an e-mail to Liam Byrne, then a Home Office minister, was published, revealing that he was informed about an illegal Brazilian immigrant who allegedly worked in Parliament on a fake ID card.
• A letter also emerged from Ms Smith to Prime Minister Gordon Brown warning that a recession would lead to a rise in crime. The Home Office said the letter was draft advice that had not been cleared by Ms Smith and had not yet been sent to 10 Downing Street.
• A further leak saw the publication of a list of Labour MPs considered likely to rebel against the Government's plans to detain terror suspects for up to 42 days without charge.
Mr Green was arrested and held by the Metropolitan Police for nine hours on 27 November.
His offices in Kent and in the Houses of Parliament and his home were also searched. He was later released on bail.
The parliamentary search took place without a warrant, after an official gave police permission.
MPs from all parties complained that these actions could undermine the ability of politicians to hold the government to account, and raised concerns that the confidentiality of information held about constituents could be at risk.
Earlier, the Commons home affairs select committee said civil servants had "exaggerated" the importance of the information passed across in order to prompt an investigation.
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