The Sun on Sunday may have filmed Labour's Lord Sewel snorting white powder with prostiutes, but the Met Police said there was "insufficient evidence to proceed" with its investigation.
Met officers raided Sewel's London home on 27 July this year, the day after the story was published, but no illegal substances were found.
The former Labour minister – who was the first peer to stand down in disgrace following new rules introduced last year allowing resignations from the Upper House – apologised for the "pain and embarrassment" caused by the drugs and sex scandal, exposed in the Sun on Sunday.
Scotland Yard said in a statement: "The Met launched a criminal inquiry into allegations of drug-related offences involving a member of the House of Lords on Monday, 27 July.
"The investigation, led by officers from the Special Enquiry Team of the Homicide and Major Crime Command, has now concluded.
"Following a review of all the material, including a forensic examination of an address in central London, there is insufficient evidence to proceed with this investigation and the matter is now closed."
The married 69-year-old quit his £84,500-a-year role as deputy speaker of the Lords and chairman of the Lords Privileges and Conduct Committee, then quit Parliament altogether.
In a statement to parliamentary officials announcing his resignation, Lord Sewel said: "I hope my decision will limit and help repair the damage I have done to an institution I hold dear… I want to apologise for the pain and embarrassment I have caused."