Prosecutors last June opened an investigation into the alleged monitoring of a cellphone Merkel used for party business, an issue that has weighed on relations between Germany and the US.
However, chief prosecutor Harald Range signaled in December that the probe wasn't going well, saying that he had found no actionable evidence. That has now led to the closing of the investigation.
German magazine Der Spiegel broke the story of the alleged monitoring in late 2013, citing documents provided by NSA leaker Edward Snowden.
"The documents published in the media so far that come from Edward Snowden also contain no evidence of surveillance of the cellphone used by the chancellor solid enough for a court," it said in a statement.
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Prosecutors said they see no prospect of success in continuing to investigate. They noted that journalists involved in publishing Snowden's documents are entitled to refuse testimony, and argued that public statements by Snowden give no indication that he has personal knowledge of the surveillance of Merkel's phone.
"The comments, which were viewed in public as a general admission of guilt, do not discharge us from (fulfilling) the burden of proof according to the requirements of criminal procedure.