Killer William Kean arranged for the money to be handed over to Robert Watson after being told that a contract had been put out on him and his family.
Watson was charged with extortion after Kean's wife Mary turned up at a Dundee cafe with her son and handed a bag of cash to him.
However, the Crown has now confirmed that the charge against Watson, originally from Dundee, has been dropped and no further proceedings will take place.
At Perth Sheriff Court last summer, Watson, 52, was alleged to have taken £11,000 by extortion after telling Kean in prison about a specific threat on his life.
Watson was accused of using threats against Kean to persuade him to hand over the money to prevent harm coming to his wife Mary and another family member.
Kean is serving life, with a minimum period of 22 years, after being found guilty of the "brutal and savage" murder of Mrs Methven in her home in 2012. He was serving that sentence in Perth Prison when Watson got in touch with him and told him about a potential "hit" on his family.
Watson was alleged to have given Kean information intended to "menace" him and "put him in a state of fear and alarm" in prison between March and May 2013.
Watson is alleged to have told Kean things which would make him apprehensive about "serious harm" being caused to him and Mary and another individual.
The 53-year-old is alleged to have told Kean that a contract had been taken out on the three of them which would "result in their serious injury or death".
Watson provided names of the gangsters supposedly involved -Jade Johnson and George Thompson - but an extensive police investigation revealed that neither existed.
A source close to the case said: "Mary Kean took a bag of cash to a cafe in Dundee and handed it someone who we understand to be Watson himself.
"He immediately went off to Portugal with it, but then he decided he could milk Kean's gullibility further. A request for a further £40,000 was made and that's when police were called in."
A spokesman for the Crown Office said: "After full and careful consideration of the facts and circumstances of the case currently available to the Crown, including the admissible evidence, Crown counsel have instructed there should be no proceedings at this stage.
"The Crown specifically reserves the right to prosecute, should the evidential position change."
It is understood a view was taken that a conviction would be difficult to achieve with the main evidence being provided by a convicted killer whose evidence had not been believed in his High Court trial.
Mrs Kean was unavailable for comment at her home in Blairgowrie, Perthshire.
Kean, 47, was found guilty of killing 80-year-old Mrs Methven at Kildinny Cottage, Forteviot, on February 20 last year. At the High Court in Glasgow, Kean blamed the victim's son and his friend, David Methven, for her death.
Judge Lord Glennie had heard how Mrs Methven's son found her in the cottage they shared. She had been hit over the head at least 11 times, leaving her skull fractured from one side to the other.