The Crown Prosecution Service (CPS) said there was "insufficient evidence" to prosecute Commander Brian Paddick for possession of cannabis.
It added that it would not be in the public interest to press charges against the 43-year-old officer for allowing cannabis to be smoked in his home.
He has always denied the accusations and played down rumours he was going to retire if he did not go back to Lambeth.
Disciplinary action
In a positing on the Urban75.com website he said: "I am not giving up ... not now, not ever, never!
"No, I am not going to resign. Softly, softly ..."
But he could still face disciplinary action from the Metropolitan Police Authority.
It has been sent a report by Deputy Chief Constable Gordon Clark of Humberside Police, who carried out a four month inquiry into the allegations.
New appointment
Last month, the Association of Chief Police Officers conduct subcommittee delayed a decision on Mr Paddick until the CPS had decided whether there should be a criminal prosecution.
Commander Paddick, Britain's highest ranking openly gay officer, was moved from his £93,000 post in Lambeth, south London, after the drugs allegations were made by former boyfriend James Renolleau in March.
A CPS spokeswoman said: "The decision took account of recent decisions in similar cases, the circumstances of the offence, the age of the offence, the likely sentence and Commander Paddick's position in the Metropolitan Police force."
Mr Paddick has now been appointed to help implement the National Intelligence Model, the Metropolitan Police's new blueprint for reducing crime.
Commander Paddick came to prominence last year for introducing a more lenient police approach to cannabis in Lambeth.
People caught with small amounts of the drug were given a formal warning rather than arrested and the cannabis confiscated.
The initiative caused concern among senior police officers, as did Mr Paddick's comments on a website where he expressed an attraction to the concept of anarchy.