In a 22-page statement distributed to news organizations, Elyakim Rubinstein cited "difficulties with the evidence" that made a conviction of Netanyahu and his wife Sara unlikely. Police suspected the couple of conspiring with a government contractor in a kickback scheme, illegally keeping gifts, and obstructing justice.
"I have decided to close the file against Mr. Netanyahu concerning the suspicions attributed to him because of evidence insufficient for a criminal trial," Rubinstein said.
The announcement comes at a sensitive time for Barak, who soundly defeated Netanyahu in May 1999 elections. Barak's far-reaching peace proposals have lost him majority support in Parliament, and Netanyahu's hard-line Likud party hopes to force him out once Parliament reconvenes Oct. 30.
Recent polls indicate that Barak would handily defeat Netanyahu's successor as party leader, Ariel Sharon, but the same polls show Barak and Netanyahu in a dead heat.
Netanyahu is slated to arrive in Israel on Thursday from the United States, and aides have strongly hinted that he will announce his return to the political fray before the Jewish New Year, which starts Friday afternoon.
"I think that any person who can contribute -- and Benjamin Netanyahu can contribute a lot -- to the state of Israel needs to" lead the Likud, Netanyahu's former spokesman, Shai Bazak, told army radio.
Rubinstein's report hardly lets Netanyahu off the hook. He said the Netanyahus' relationship with a contractor who allegedly carried out more than $100,000 worth of services for them for free was improper.
"The considerations were difficult. There was a consensus by everyone who dealt with this that this was not a proper way to run government," Rubinstein said. "The image of the public service in the eyes of the public ... is a vital condition for the existence of proper government."
The news of a possible Netanyahu comeback came as Israeli and Palestinian negotiations intensify a bid to work out a final peace agreement while Barak is still in office.
Not everyone in the Likud was heartened by the prospect of Netanyahu's return. Israel radio reported that Sharon was considering helping Barak delay elections by joining the coalition in a national unity government.
Likud lawmaker Ruby Rivlin, who is close to Sharon, called on Netanyahu to make a quick announcement and "stop the flurry of whispers and to stop the waiting that could cause a pain in the neck to the chairman of the Likud."
Netanyahu is seen as the most powerful potential challenger to Prime Minister Ehud Barak, who is hobbled by a minority government and facing the prospect of new elections when Parliament reconvenes on Oct. 30.
Netanyhu has been residing in the United States, working as an adviser to start-up companies and keeping largely out of the public eye.
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