The Ringwood MP resigned from the party's parliamentary ranks in August after former premier Daniel Andrews' office referred allegations of a serious assault in the Melbourne CBD to Victoria Police.
The 45-year-old, who has always maintained his innocence, was arrested and interviewed in October before being released without charge.
Police confirmed on Tuesday the sexual crimes squad had concluded its investigation into the alleged incident.
"While a rigorous and methodical investigation has been conducted into the matter, in conjunction with senior legal advice, it has been determined that charges will not be laid at this time," the force said.
"Any further information provided to police will be thoroughly assessed."
Everyone involved in the inquiry has been informed of the decision.
Former Victorian Labor MP Will Fowles has always maintained his innocence in a sexual assault case. (James Ross/AAP PHOTOS)
Mr Fowles acknowledged the police investigation had closed and would not lead to charges.
"I have always maintained my innocence in the matter and I am looking forward to continuing my work for my constituents in parliament," he said in a statement released on Tuesday afternoon.
When the allegation came to light, Mr Fowles said he expected to be cleared and vowed to fully co-operate with any process or inquiry.
Premier Jacinta Allan said Mr Fowles would not be returning to Labor's parliamentary party ranks.
"The wellbeing of staff and their right to a safe workplace is not negotiable and we will always act on any allegations of a serious nature," she said in a statement.
"The member for Ringwood was asked to resign from the parliamentary Labor Party in August last year.
"He will not return."
The complainant will continue to be supported and their privacy must be respected at this time, Ms Allan said.
Mr Fowles kicked in a door inside a Canberra hotel in 2019 before being accused of sexual assault. (Erik Anderson/AAP PHOTOS)
Police did not immediately launch a formal investigation after the referral, citing the lack of a formal complaint from the alleged victim, whose identity remains unknown.
The now-independent MP has been absent from state parliament but continued to appear in the Ringwood community in an official capacity.
In his absence, the government removed him as the chair of the electoral matters committee, which paid an extra $19,883 a year on top of his base MP salary of $198,839.
In 2019, Mr Fowles smashed the lower half of a door at Canberra's Abode Hotel during an argument with staff about his luggage.
Mr Fowles said his actions in Canberra were driven by anxiety, as he wasn't able to access his luggage containing medication but acknowledged that was no excuse.
He took a leave of absence of nearly three months to deal with addiction and mental health issues.
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