Seamus Daly, 45, had been on remand in prison since being charged with the Real IRA atrocity in April 2014.
Omagh Bombing
- 15 August 1998
- 29 deaths (including a mother pregnant with twins)
- Intended target was the Omagh courthouse
- Real IRA blamed
- No prosecutions
No-one has ever been convicted of the murders in a criminal court and no-one else is being held by police.
The Evangelical Alliance in Northern Ireland has called for prayers for healing following the announcement.
Director Peter Lynas told Premier's News Hour: "[Pray] for healing of the past and that those folks can find a way to move forward.
"We're involved in 100 days of prayer here around that healing of the past and hope for the future and churches are leading that.
"I think that's the way to move ahead in this."
Daly, from Co Armagh, has always denied involvement in the bombing which inflicted the greatest loss of life of any terror atrocity in the history of the Northern Ireland Troubles.
The dead came from both sides of the Irish border, England and Spain. One of the victims was pregnant with twins.
The dramatic decision by the Northern Ireland Public Prosecution Service (PPS) comes before Daly's case had even reached the floor of the Crown Court.
A pre-trial hearing commenced in Omagh Magistrates' Court last week to establish whether the evidence in the case was of sufficient strength to warrant such a trial.
That decision has now been taken out of District Judge Peter King's hands, as the PPS has withdrawn the charges before the preliminary hearing had reached conclusion.
Seamus Daly
Peter Lynas said: "As a society overall we do have a very effective peace process here and we are trying to move forward in that."
Michael Gallagher, whose son Aiden was killed, said he was unhappy that information was circulating on Tuesday morning about the collapse of the case, yet he and other families had not been informed by the authorities.
"We have been failed once again by the police service, by the prosecution service, by the government and by the criminal justice system," he said.
Seamus Daly has now been released from prison.