The Crown Prosecution Service (CPS) said there was "insufficient evidence" to bring a case for indirect involvement in the kidnap, false imprisonment or torture of Abdelhakim Belhaj and Sami al-Saadi in 2004.
However, it said a British official was in contact with foreign agents responsible for the seizure of the two men and their families in Asia and their transfer to Libya.
It "remains unclear what impact or influence" the Briton's involvement had, prosecutors said in a statement.
"With today's official acknowledgement that British officials were involved in this rendition, the fig leaf of official secrecy in this case is in tatters," she said.
"There is one crucial question: who knew who was on those planes, and for those who knew, what possible reason can there be for them to evade justice?"
Belhaj, a former Islamist militant who became Tripoli's military commander after Kadhafi was ousted in 2011, claims he was detained with his pregnant wife at Bangkok airport and illegally transferred to Libya.
London police launched an investigation into possible the possible complicity of British officials in 2012, and subsequently passed evidence relating to one suspect to prosecutors.
"Following a thorough investigation, the CPS has decided that there is insufficient evidence to charge the suspect with any criminal offence," said Sue Hemming, head of the service's special crime and terrorism division.
The CPS said British officials were not directly involved in the Libyans' treatment.
But one of them communicated with those responsible, shared aspects of what was happening with others in Britain and sought political authority for his actions.
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