Prosecutors had said Steve Rosen and Keith Weissman intended to disclose the details to Israel and to the media.
But the government said it was unlikely to win the case and that trial could exposed classified information.
Critics said the case had been a bid to criminalise commonplace exchanges between journalists and politicians.
Mr Rosen and Mr Weissman, formerly working for the influential American Israel Public Affairs Committee (Aipac), were the first lobbyists to be charged under the Espionage Act of 1917.
Acting US attorney Dana Boente said that when the charges were first filed, "the government believed it could prove this case beyond a reasonable doubt based on the statute".
But he said that after the Judge TS Ellis demanded that prosecutors proved the men intended to harm the US with their actions, there was now a "diminished likelihood the government will prevail at trial".
In the statement to the court, Mr Boente asked that they dismiss the indictment given the "inevitable disclosure of classified information that would occur at any trial in this matter".
'Hardship'
Lawyers for the two men said the decision was "a huge victory for the First Amendment", which constitutionally guarantees the right to free speech in the US.
The Associated Press reported Baruch Weiss as saying that a prosecution victory would have set a precedent for journalists seeking sensitive information to face possible prosecution.
But Mr Weiss said the four-year process had been a "tremendous hardship" for the two men, who were dismissed by Aipac in 2005.
Former defence analyst Lawrence Franklin was sentenced to 12 years and seven months in jail in 2006 for disclosing classified information to Mr Rosen and Mr Weissman.
But the government said it was unlikely to win the case and that trial could exposed classified information.
Critics said the case had been a bid to criminalise commonplace exchanges between journalists and politicians.
Mr Rosen and Mr Weissman, formerly working for the influential American Israel Public Affairs Committee (Aipac), were the first lobbyists to be charged under the Espionage Act of 1917.
Acting US attorney Dana Boente said that when the charges were first filed, "the government believed it could prove this case beyond a reasonable doubt based on the statute".
But he said that after the Judge TS Ellis demanded that prosecutors proved the men intended to harm the US with their actions, there was now a "diminished likelihood the government will prevail at trial".
In the statement to the court, Mr Boente asked that they dismiss the indictment given the "inevitable disclosure of classified information that would occur at any trial in this matter".
'Hardship'
Lawyers for the two men said the decision was "a huge victory for the First Amendment", which constitutionally guarantees the right to free speech in the US.
The Associated Press reported Baruch Weiss as saying that a prosecution victory would have set a precedent for journalists seeking sensitive information to face possible prosecution.
But Mr Weiss said the four-year process had been a "tremendous hardship" for the two men, who were dismissed by Aipac in 2005.
Former defence analyst Lawrence Franklin was sentenced to 12 years and seven months in jail in 2006 for disclosing classified information to Mr Rosen and Mr Weissman.
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