Foreign funding of political campaigns is illegal in Israel.
An indictment of Sharon could have jeopardised his "disengagement" plan after parliament on Wednesday removed a major hurdle by approving compensation to Jewish settlers to be evacuated from occupied land in Gaza and parts of the West Bank.
While Sharon emerged largely unscathed, his son and close adviser Omri, 40, was indicted on criminal charges including fraud, breach of trust and perjury. A legal expert told Israel Radio he could face up to seven years in prison if convicted.
Mazuz stopped short of fully exonerating Sharon and his ex-aides, saying that closing a criminal case did not amount to a "public clean bill of health for that person's deeds".
Sharon had denied any wrongdoing in the funding case, saying his two sons alone handled financing for his 1999 primary campaign for leadership of the right-wing Likud party. Sharon's sons had remained silent on the scandal.
"The attorney general decided to close due to insufficient evidence the investigation as matters relate to Prime Minister Ariel Sharon," the ministry said in a statement.
Cases were also dropped against former senior advisers Dov Weisglass and Uri Shani.
"An indictment against Omri Sharon leads to Ariel Sharon," Ran Cohen, a lawmaker from the leftist opposition Yahad party told the daily Maariv. "The court might judge the son but the public will judge the father."
Prosecutors will have to ask the Knesset to lift parliamentary immunity for Omri Sharon, a member of the assembly, to put him on trial. Israeli Radio quoted him as saying his only comment would be to the attorney general.
Sharon and his sons still face a separate but related investigation into accusations that a $1.5 million loan from a South African businessman was used as collateral to repay what prosecutors say were illicit contributions to his primary race.
Last June, Mazuz dropped a long-running bribery case against Sharon that had threatened to topple him, citing lack of evidence, despite the chief prosecutor's recommendation to indict him.
Investigators had looked into whether Sharon, as foreign minister in the 1990s, had used his influence to help a developer win approval for an Aegean resort.
Israeli prime ministers and their advisers have frequently come under investigation, accused of financial infractions, but no premier has ever been charged while in office.