Although the prosecutor’s decision can be appealed, it probably closes the case, which was launched in 2010.
The accuser’s lawyer said she was studying whether to appeal it.
Assange skipped bail in Britain to avoid possible extradition and took refuge in the embassy in 2012.
He was dragged out by police in April this year, and is now in jail fighting extradition to the United States on computer hacking and espionage charges unveiled after he left the embassy.
While Assange was in the embassy, the statute of limitations ran out on investigating all but one of several Swedish sex crime complaints originally filed by two women.
Deputy Chief Prosecutor Eva-Marie Persson reopened the remaining case after Assange left the embassy but she said on Tuesday the passage of time meant there was not enough evidence to indict Assange.
“After conducting a comprehensive assessment of what has emerged during the course of the preliminary investigation, I then make the assessment that the evidence is not strong enough to form the basis for filing an indictment,” she told a news conference.
“Nine years have passed. Time is a player in this decision.”
Australian Assange, 48, has repeatedly denied the sex crime allegations, calling them part of a plot to discredit him and secure his eventual transfer to the US.
“Let us now focus on the threat Mr Assange has been warning about for years: the belligerent prosecution of the United States and the threat it poses to the First Amendment,” WikiLeaks editor-in-chief Kristinn Hrafnsson said in a statement.
Assange’s Swedish lawyer, Per Samuelson, said as far as he was aware, his British lawyers had not yet been able to contact Assange in jail to inform him of the Swedish decision.
“This is the end of Assange’s association with the Swedish justice system,” Samuelson said.
“But he is not happy with the way he’s been treated. He lost faith in the Swedish justice system years ago.”
Elisabet Massi Fritz, lawyer for the accuser, told Reuters in a text message that she and her client would discuss whether to request a review of the decision to drop the case.
The right decision would have been to interrogate Assange in London and then charge him with rape, she said.
“After today’s decision my client needs time to process everything that has happened over these nine years in order to be able to move on with her life.”
The decision by the Swedish prosecutor heads off a potential dilemma for the British courts which might otherwise have had to decide between competing US and Swedish extradition requests.
Since leaving the embassy, Assange has served a British sentence for skipping bail.
He is now being held pending his next hearing in February on the US extradition request.
He faces 18 criminal counts including conspiring to hack government computers and violating an espionage law.
A spokesman for Assange’s legal team said: “From the outset of Sweden’s preliminary investigation, Julian Assange’s expressed concern has been that waiting in the wings was a United States extradition request that would be unstoppable from Sweden – and result in his spending the rest of his life in a US prison.
“Now that the US does seek Mr Assange’s extradition to stand trial on unprecedented charges for journalistic work, it continues to be a matter of extreme regret that this reality has never been properly acknowledged and that the process in Sweden – with which Mr Assange has always expressed his willingness to engage and indeed did so – became so exceptionally politicised itself.”
Greg Barnes, adviser to the Australian Assange campaign, said: “The decision by Sweden is the only one it could have taken. It finally recognises that Julian Assange’s adamant denial of wrongdoing is the truth. It is the US that must now be persuaded to drop its unfair and dangerous pursuit of Assange.
“Australia must now step up its actions to protect an Australian citizen whose very life hangs in the balance.”
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