Convicted IRA member John Downey, 62, had received a "letter of assurance" in Northern Ireland in 2007 there would be no bid to prosecute him when there was an outstanding warrant against him.
Despite regularly travelling to the UK and Northern Ireland from his home in County Donegal, Mr Downey was charged just last May following his arrest at Gatwick Airport. He strenuously denied the murder of four British soldiers and causing an explosion.
The judge, Mr Justice Sweeney, threw the case out after his lawyer argued at the 11th hour that the defendant should not go on trial at the Old Bailey. Yesterday, the Crown announced that it would not appeal against the decision.
At an earlier hearing, Henry Blaxland QC warned of the political ramifications in Northern Ireland of pursuing a trial against Mr Downey in such circumstances, saying the false assurance he received was "not just negligent, it was downright reckless".
In his judgment, Mr Justice Sweeney said there were "very particular circumstances" to the case. The public interest in prosec-ution was "very significantly outweighed" by the public interest in ensuring that "executive misconduct does not disrepute" , and in "holding officials of the state to promises they have made in the full understanding of what is involved in the bargain".
The legal row raised questions about the Police Service of North-ern Ireland which, the court heard, knew about the UK arrest warrant for Downey but did nothing to correct the error of 2007.
Afterwards, relatives of the four soldiers said in a statement: "It is with great sadness and bitter disappointment that we have received the full judgment and that a trial will now not take place.
"This news has left us all feeling devastatingly let down, even more so when the monumental blunder behind this judgment lies at the feet of the Police Service of Northern Ireland."
Northern Ireland chief constable Matt Baggott apologised to the families, saying: "I deeply regret these failings, which should not have happened."
He said checks were under way on information processed by the force about other similar cases.
Northern Ireland Secretary Theresa Villiers said police there should reflect on the serious error.
President of the Association of Chief Police Officers Sir Hugh Orde, who was chief constable of Northern Ireland at the time of the error, said: "It is a matter of great personal regret that a crucial oversight was made by a senior officer which resulted in erroneous information being sent to Mr Downey by the Northern Ireland Office and thus prejudicing the current indictment."
Prosecutor Brian Altman QC yesterday acknowledged the pain of the victims' families "who must live with the consequences of it daily, and with the memories of that dreadful event".
The soldiers were killed on July 20 after the bomb went off as they rode through the park.
Mr Downey's fingerprints were found on parking tickets and there was a description given by witnesses of two men carrying out reconnaissance in the area.
An arrest warrant was issued, but it was decided not to seek Mr Downey's extradition in part due to a lack of evidence against him.
In 2007, Mr Downey received assurance he was not at risk of prosecution as part of a scheme run by the Northern Ireland police.
He was among 187 "on the runs" to seek clarification from the authorities after the Good Friday Agreement.