British prosecutors examining allegations of illegal political funding said today there was not enough evidence to charge one of four people arrested in that inquiry.
The Crown Prosecution Service (CPS) said it had told police it would not proceed against Des Smith in an investigation into whether political parties awarded state honours that come with seats in parliament's upper house in return for cash.
Head teacher Mr Smith had denied any wrongdoing. He was a former adviser on Blair's flagship schools programme who is alleged to have told an undercover journalist that businessmen could get a state honour by sponsoring the so-called City Academies scheme.
"Although it is clear that Mr Smith made some indiscreet comments to an undercover journalist, his conversations did not provide evidence that he was trying to obtain funding for City Academies in exchange for honours," the CPS said in a statement.
Mr Blair has been interviewed twice by police as a witness, not a suspect, becoming the first serving British prime minister to be questioned in a criminal investigation.
Three other people have been arrested and later bailed, including Lord Michael Levy, Mr Blair's chief fundraiser and Middle East envoy, and Ruth Turner, director of government relations in Mr Blair's office. Labour donor Christopher Evans was also arrested and bailed.
All deny wrongdoing.
The police investigation, under way since March last year, has damaged the Labour Party and has fuelled speculation about Mr Blair's departure date.