Michael Jones, 66, was arrested in Beverley, Yorkshire back in December, after comments he made about Islam and ISIS [Islamic State]. He was charged with two allegations under the Crime and Disorder Act 1998.
Despite suggesting he was willing to go to court to fight his case, the CPS decided not to escalate.
He was accused of shouting "Muslims are terrorists, they should not be allowed in this country", "Islam is not a religion, Islam is terrorism" and "Islam does not preach the Bible, it's not religion, it's terrorism".
But campaign group Christian Concern claims an audio recording of his preaching revealed that none of these phrases were actually used.
In a letter dropping the charges, the CPS said: "The decision to discontinue these charges has been taken because there is not enough evidence to provide a realistic prospect of conviction."
Mr Jones is being supported by the Christian Legal Centre.
Responding to the development, CEO Andrea Williams concluded: "The CPS is absolutely right to drop the case, but it is shocking that Michael was taken into custody and charged at all. The actions of the police demonstrate a fear and over-sensitivity when it comes to critiquing Islam.
"We are currently advising Michael on a possible case against the police for unlawful arrest."
Last year, another street preacher - Michael Overd - successfully appealed his public order conviction after he was accused of making a homophobic sermon.
A judge said the Crown Prosecution Service had failed to supply enough evidence to find him guilty.