The Scottish Episcopal Church suspended the Right Reverend Anne Dyer in August 2022 as the bishop of Aberdeen and Orkney after three complaints were lodged and taken forward against her. She was due to face a hearing.
Following a review by the church's independent procurator, it is not deemed in the public interest to pursue a disciplinary tribunal despite "sufficient evidence to provide a realistic prospect of conviction" under the Christian denomination's canon law.
Bishop Dyer has always denied any wrongdoing.
Outlining his decision, Paul Reid KC said: "It has become apparent that the prospect of giving evidence, and in particular facing cross-examination in a public forum, is a source of anxiety for a number of potential witnesses."
He added: "Given the already difficult situation in the diocese, a public trial very materially risks, whatever its outcome, making an already difficult situation worse.
"That, taken with the concerns expressed by a number of complainers/witnesses about the prospect of giving evidence, cause very real concern about continuing with this prosecution."
Mr Reid concluded he was "not satisfied" it remained in the public interest to continue the prosecution given the "continuing effect upon the complainers, the length of time before the accusations would go to trial and the likely outcome of the proceedings (both for the bishop and also the diocese more generally)".
Bishop Dyer's suspension has now been lifted. The church said she will resume duties in the diocese in "due course".
Bishop Mark Strange, primus of the Scottish Episcopal Church, said: "This has been a long and difficult process for everyone involved, and I recognise that the outcome will be welcomed by some but will disappoint others.
"The College of Bishops calls on all in the diocese of Aberdeen and Orkney, and the wider church, to work together to achieve reconciliation and healing as we look to the future."
Bishop Dyer was contacted for comment.