"I can conclude, based on the evidence, that probable cause for this crime still exists", chief prosecutor Marianne Ny told reporters in Stockholm.
"The decision to discontinue the preliminary investigation is not because we've been able to make a full assessment of the evidence in this case, but because we didn't see any possibilities to advance the investigation forward".
Dropping the investigation is not a result of deciding he is not guilty, Ny added - it's because there's no practical way to continue it.
The UN Working Group on Arbitrary Detention said in 2016 that Assange was in effect being arbitrarily detained in violation of worldwide law.
It does not clear Assange's name, however, and some experts say it puts him into an even more precarious legal situation if the US has - as some suspect - a sealed indictment for his arrest.
He said Assange had convinced Swedish prosecutors during a November meeting a year ago that he was not guilty of any sex offenses.
In May, Assange's lawyers asked the Stockholm District Court to review the detention order and arrest warrant against him. More serious are the possible charges he faces in the United States for WikiLeaks' aggressive publication of thousands of pages of classified government documents.
While a grand jury investigation of Assange has never been officially confirmed, Attorney General Jeff Sessions has said that the WikiLeaks founder's arrest remains a "priority", and a federal inquiry is widely assumed to be underway by prosecutors in Virginia.
According to his lawyer, Assange wants political asylum in France after he leaves the Ecuador embassy.
"You may be an enemy of the state but you are not an enemy of humanity", Lady Gaga told Assange in the video interview, which was released by Wikileaks on Wednesday.
However, Assange has maintained he is "entirely innocent".
Deputy Labor leader Tanya Plibersek, speaking in Sydney earlier, said Assange still had questions to answer, but Mr Barns said there were no outstanding issues and he would welcome a call from her.
Assange's lawyers celebrated the temporary victory, but he still faces some repercussions in London.
Assange said this on Friday after Sweden dropped its probe into the allegation of rape against him.
The UK's Home Office was unable to comment on the implications of the decision because of the upcoming election.
Ecuador Foreign Minister Guillaume Long said the United Kingdom should now grant Assange safe passage, as the European arrest warrant against him "no longer holds".
"The UK said it would arrest me regardless", he stated.
"Westminster Magistrates' Court issued a warrant for the arrest of Julian Assange following him failing to surrender to the court on the 29 June 2012". The Metropolitan Police says there's a British warrant for Assange's arrest after he jumped bail. "The MPS will provide a level of resourcing which is proportionate to that offence".