The withdrawal of case comes in the wake of a local court ruling, which said that there were sufficient grounds to frame charges against Jain in the defamation case filed by Hazare.
Jain, former Food and Civil Supplies Minister, was arrested in 2012 in connection with the multi-crore Gharkul housing scheme scam in Jalgaon and is currently in jail.
"Jain has been in jail since the last four years and his bail application has been rejected multiple times. In such condition, it seems that ageing Jain will not come out of the jail," Hazare said in a release.
Last month, a Pune court had framed charges against Jain after finding him 'prima-facie' accused of defaming Hazare.
Hazare further said, "Jain, who is currently in jail, is being punished for his deeds and since I have no personal grudge against him, I am not interested in pursuing the present defamation case against him and believe that he will be punished by judiciary."
Hazare had filed the defamation case against Jain in 2003 after the former minister had levelled corruption charges against the anti graft crusader and called him the "most corrupt" person.
Hazare, who had then launched a campaign against corruption, had accused Jain of graft. However, Jain had alleged that Hazare had misappropriated funds under the guise of his Hind Swaraj Trust.
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