Tayyab Subhani, 30, and Mohammed Safdar, 42, were arrested on May 24 after a Boeing 777 flying from Lahore to Manchester was forced to make an emergency landing at Stansted Airport in Britain.
In court, the two men were described as "idiots not terrorists" after several witnesses told the judge that they had not heard the men make a bomb threat though they had acted like idiots.
It had been claimed Safdar, supported by Subhani, had made threats to kill crew and passengers after an argument with air stewards at 30,000 feet.
Prosecutor Brian O'Neill said: "In light of the state of the evidence, it has been decided it is no longer appropriate to seek convictions in this case."
Nadeem Sufi, captain of the PIA flight, originally alerted authorities to the scare. But he later told the court that as the severity of the diversion became apparent, he tried to reverse this decision by telling air traffic control that the men were "laughing and joking".
The court also heard that PIA had released its own internal inquiry, which contradicted evidence given by its staff to police and in court.
The two British citizens were travelling back from Pakistan after attending Safdar's mother's funeral.
The plane with 308 passengers was shadowed into Stansted - Britain's designated counter-terrorism airport - by Royal Air Force jets after the pilot reported threats being made.
Endangering an aircraft carries a maximum sentence of life imprisonment and the men's case was dealt with under UK's Aviation Security Act of 1982.
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