Scotland Yard is investigating phone hacking at the News of the World Scotland Yard has "decided not to pursue" its legal bid to force the Guardian to reveal the sources it used for stories about phone hacking.
A hearing was scheduled for Friday but police said it had consulted the Crown Prosecution Service and opted "at this time" not to go ahead with the hearing.
The CPS said it had asked for more information and more time.
Guardian editor Alan Rusbridger said the paper welcomed the Met's decision "to withdraw this ill-judged order."
The Met is looking into leaks by an officer from Operation Weeting - which is investigating hacking by the News of the World - to the Guardian newspaper about murdered girl Milly Dowler's phone being hacked by the tabloid.
It had applied for a production order against the Guardian and one of its reporters "in order to seek evidence of offences connected to potential breaches relating to Misconduct in Public Office and the Official Secrets Act".
But, after consulting the Crown Prosecution Service on Monday and taking further legal advice on Tuesday, the force says it has decided not to proceed.
'Not targeting journalists'
"This decision does not mean that the investigation has been concluded," a statement from Scotland Yard said.
"This investigation, led by the DPS [Directorate of Professional Standards] - not Operation Weeting - has always been about establishing whether a police officer has leaked information, and gathering any evidence that proves or disproves that.
"Despite recent media reports there was no intention to target journalists or disregard journalists' obligations to protect their sources."
While pleased with the latest move, Mr Rusbridger said: "Threatening reporters with the Official Secrets Act was a sinister new device to get round the protection of journalists' confidential sources.
News of the hacking of Milly Dowler's phone led to the closure of the News of the World
"We would have fought this assault on public interest journalism all the way. We're happy that good sense has prevailed."
The National Union of Journalists also criticised the use of the Official Secrets Act by the police, with the union's General Secretary Michelle Stanistreet describing it as "flagrant abuse".
"This was an outrageous attack on a central tenet of journalism - the protection of our sources. This is a victory for journalism, democracy and press freedom," she said.
However, Scotland Yard said that the application for production orders was made under the Police and Criminal Evidence Act and not the Official Secrets Act.
"The Official Secrets Act was only mentioned in the application in relation to possible offences in connection with the officer from Operation Weeting, who was arrested on August 18 2011 on suspicion of misconduct in a public office relating to unauthorised disclosure of information."
The Crown Prosecution Service and Met Police said they would work jointly in considering the next step.
The Guardian's report in July about Milly Dowler's phone being hacked re-ignited the phone-hacking scandal, leading to the News of the World's closure.
News International, publisher of the News of the World, is understood to be close to a £3m compensation deal with the Dowler family, which could include a £1m donation to charity.
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