Jennifer Sherlow was said to have shouted the "racially offensive remark" from inside her home while Birgit Bahmani was in her garden.
But the case against the 31-year-old of Weensland Park, Hawick, Roxburghshire, was thrown out because the Crown had not ordered a German-speaking interpreter for the trial.
Procurator fiscal Graham Fraser had asked for the trial at Jedburgh Sheriff Court to be adjourned to a new date to allow an interpreter to be present.
However, this motion was opposed by defence lawyer Robert More who said Ms Sherlow was anxious the matter was dealt with immediately due to health grounds.
He also added that Ms Sherlow strenuously denied the allegation and pointed out that Ms Bahmani was facing a charge of previously calling her a "Scottish slut".
Mr More said: "This allegation has been made to deflect attention from the prosecution that the complainer faces. It would not be in the interests of justice to proceed further."
Sheriff Derrick McIntyre refused for the trial to be adjourned and when the fiscal said he would not be leading evidence without the witness, the case against Ms Sherlow was deserted.