Swedish deputy director of public prosecutions, Eva-Marie Persson, announced the decision to drop the investigation again at a press conference in Stockholm on Tuesday afternoon.
The investigation was launched after a Swedish woman who met Assange at a WikiLeaks conference in Stockholm in August 2010 accused the Australian of having unprotected sex with her while she was sleeping. She said she had previously repeatedly refused to have unprotected sex with him.
Assange has always denied the allegation.
Persson said that she found the woman behind the accusation "credible and reliable", but that supporting witness statements had been weakened by the amount of time that had passed since the alleged incident.
"I would like to emphasize that the injured party has submitted a credible and reliable version of events. Her statements have been coherent, extensive and detailed; however, my overall assessment is that the evidential situation has been weakened to such an extent that that there is no longer any reason to continue the investigation," she said in a statement published by Sweden's prosecution authority.
Prosecutor Eva-Marie Persson. Photo: Jessica Gow/TT
Assange has been held at a top-security British prison since April after police dragged him out of the Ecuadoran embassy in London, where he had been holed up since 2012 to avoid an extradition order to Sweden.
The 48-year-old was subsequently sentenced to 50 weeks in prison for breaching bail conditions when he took refuge in the embassy.
Following his arrest, Swedish authorities reopened their 2010 rape investigation, which had been closed in 2017 on the argument it was not possible to proceed with the probe as Assange could not be reached.
In September, prosecutors said they had interviewed seven witnesses over the summer in a bid to move the inquiry forward.
The statute of limitations in the case was to expire in August 2020.
The plaintiff's lawyer, Elisabeth Massi Fritz, told AFP that she and her client would consider whether to appeal the prosecutor's decision.
"I, and all of the prosecutors who have worked on this case, have always considered the plaintiff credible and reliable. As is the case today. The plaintiff stands by her strong account," 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."
Assange is also fighting a US bid to extradite him from Britain on charges filed under the Espionage Act that could see him given a sentence of up to 175 years in a US prison.
Most of those charges relate to obtaining and disseminating classified information over his website WikiLeaks publishing military documents and diplomatic cables.
WikiLeaks editor-in-chief Kristinn Hrafnsson hailed the Swedish decision and said the US charges were Assange's main concern.
"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," he said in a statement.