In rulings released at the Marines Camp Pendleton base in southern California, Lieutenant General James Mattis announced that charges against Lance Corporal Justin Sharratt and Captain Randy Stone had been dropped.
Sharratt had been charged with three counts of murder while Stone was accused of failing to properly investigate the incident, the most serious case of alleged war crimes involving US forces in Iraq.
Prosecutors allege Marines went on a rampage, shooting men, women and children in the hours after a roadside bombing that tore a popular comrade in half while on patrol in Haditha on November 19, 2005.
Lawyers for soldiers in the case have insisted Marines acted lawfully and according to battlefield rules of engagement.
In his ruling, Mattis said after studying the report of an investigating officer in Sharratt's case there was insufficient evidence to press charges.
"Based on my review of all the evidence in this case ... I have dismissed the charges," Mattis said.
Sharratt was accused of shooting three Iraqi men execution-style during the incident. Sharratt said the men were shot at close quarters as Marines cleared a house where insurgents were believed to be operating.
In a statement recommending charges against Sharratt be dropped released last month, investigator Lieutenant Colonel Paul Ware said the allegations were "unsupported by the independent evidence."
"To believe the government version of facts is to disregard clear and convincing evidence to the contrary," Ware added.
Mattis said Marines in Iraq were "fighting a shadowy enemy who hides among the innocent people, does not comply with any aspect of the law of war, and routinely targets and intentionally draws fire toward civilians."
"The challenges of this combat environment put extreme pressures on our Marines," Mattis wrote in his ruling.
In a statement released by his lawyers, Sharratt said he was relieved the case was closed but expressed concern for other Marines still facing charges.
"Though I am glad I will be able to move on with my life, my heart is still heavy for my fellow Marines ... who continue to face serious charges," Sharratt said.
A total of eight Marines were initially charged last December over the Haditha case. Four soldiers were accused of murder counts while four senior officers were charged with failing to properly investigate the deaths.
A Marines press release following the bloodshed said 15 people had died in a massive roadside bomb. The Marines later acknowledged the release was false after a lengthy probe.
Stone, 35, had been charged with violation of a lawful order and two counts of dereliction of duty over the way the Haditha incident was reported.
However, after a preliminary hearing to determine whether Stone should face court martial, Mattis said he was satisfied his actions were not criminal.
"I have thoroughly reviewed and considered all of the evidence surrounding the Haditha incident and Captain Stone's conduct with respect to command reporting of and response to the incident," Mattis wrote.
"I am aware of the line that separates the merely remiss from the clearly criminal, and I do not believe that any mistakes Captain Stone made with respect to the incident rise to the level of criminal behavior."
Stone, a military judge who presides over court martials, was one of the most senior officers to be charged in the case.
The decision to drop charges against Stone and Sharratt leaves five other Marines -- two soldiers and three officers -- facing charges in the case. Another soldier, Sergeant Sanick De La Cruz, had murder charges dropped after agreeing to testify in other cases.
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