Kerala state police said Joseph Cooper had violated his tourist visa by indulging in missionary activity.
Mr Cooper, 68, is still in a private hospital with stab wounds.
Police said Hindu nationalists had been planning to bring a court case based on visa rules.
Ten arrests
A senior police official said: ''The court would have upheld the appeal and the police would have been left shame-faced.''
Mr Cooper, an ordained bishop of the New Jerusalem church from Pennsylvania, had been given seven days to leave because of his injuries.
Police have arrested 10 members of the hardline Hindu Rashtriya Swayamsevak Sangh (RSS) over the attack.
The RSS, which denies involvement, has close ties to the Hindu nationalist Bharatiya Janata Party that heads the federal coalition government.
The attack took place on the outskirts of the state capital, Trivandrum, on 13 January.
Five more hurt
Eyewitnesses said Mr Cooper was surrounded by an armed gang of 10 people as he was returning from a gospel convention organised by the Protestant Friends of the Bible Church.
The gang reportedly attacked Mr Cooper and others with swords, sticks and iron bars.
A local pastor, his wife and two children and one other person were also injured.
Mr Cooper later said he had done nothing wrong under the Indian constitution.
He said he had participated in missionary meetings regularly during 11 visits to India.
About one-third of the population of Kerala is Christian and attacks of this kind are rare.
But local people told the BBC that in recent months some right-wing Hindu organisations had been protesting against religious minorities.