State prosecutor Shaun Abrahams on Monday said he had decided to overrule the decision to prosecute Gordhan.
Abrahams, leader of the National Prosecuting Authority (NPA), said he foresaw difficulties in proving the charges against Gordhan, which caused political rifts to emerge in the ruling African National Congress (ANC) party.
"I am satisfied that... Gordhan did not have the requisite intention to act unlawfully," Abrahams said. "I have directed the summons to be withdrawn with immediate effect."
Earlier this month, the NPA charged Gordhan with committing tax fraud a decade ago. The minister had been slated to appear in court on Wednesday on charges that he was responsible for a 1-million-rand (70,000-dollar) fraudulent pension payout to be made to a colleague while he was serving as head of the South African Revenue Service (SARS) from 1999 to 2009.
He is also accused of creating a rogue tax surveillance unit during his time at the tax agency. Abrahams said that the probe into the unit's actions would continue.
Gordhan, who is widely respected in financial markets, said the accusations were politically motivated "mischief."
Analysts have said the charges could be a ploy by President Jacob Zuma and allies to discredit the man who stood in the way of their securing access to lucrative government contracts. Zuma has denied that there is any conflict with Gordhan, amid talk of a months-long battle within the ANC over control of the Treasury.
Worries that Gordhan - a strident opponent of corruption and excessive public spending - might be prosecuted, or even removed from his post, have also spooked markets and increased the risk that credit rating agencies would downgrade South Africa to "junk" status.
rc/tj (AFP, AP, dpa, Reuters)