The decision by Staffordshire Police has been described as 'bizarre' by the former Liberial Democrat MP, Birmingham-based John Hemming.
The force said there was 'insufficient evidence for a realistic prospect of conviction' against Esther Baker, and it would not be taking any action.
Ms Baker, aged 36, alleged three years ago that the MP sexually abused her on Cannock Chase in the 1980s and 90s.
She waived her right to anonymity to get a television interview about her alleged ordeal.
But the Crown Prosecution Service ruled last year there was insufficient evidence and Mr Hemming was never charged over the accusations.
Speaking to the Express & Star yesterday, Mr Hemming said: "The thing to emphasise about this case is the authorities decided at the start the allegations were false because they decided I was not a risk to children.
"Had the allegation suspected of being true then they would have had to seek child protection.
"It was quite clearly a load of rubbish. But it has taken three years, and in that time I have had death threats.
"And now the police have decided to use a bizarre reason of deciding there is not the evidence before investigation on a case against her [Ms Baker].
"What message does this send out? That fantasists can make up accusations like this. This is destruction to the Criminal Justice Service."
Mr Hemming said he was meeting with Staffordshire Police to discuss the decision.
He said he was considering launching a judicial review into the decision. He could also launch his own private prosecution.
Earlier this year, Mr Hemming, former MP for Birmingham Yardley, wrote to the Director of Public Prosecutions to complain about how the allegations against him were handled.
Miss Baker grew up in Walsall. She now works as a bookmaker's shop manager in Liverpool.
She is also considering legal options going forward over the case.
The email from Staffordshire Police to Mr Hemming was sent on Wednesday.
It said: "The Full Code Test has been applied to this review, and it has concluded that there is in sufficient evidence for a realistic prospect of conviction for perverting the course of justice.
"As a result, no further action will be taken in this matter.
"This concludes the Staffordshire Police investigation into these matters unless the force were to become unaware of any new evidence."