The book, "The King's Torah" has been banned for sale in Israel. Its authors Yitzhak Shapira and Yosef Shapira, and two prominent rabbis who allegedly endorsed it, were questioned by police.
A statement from the prosecutor's office said that although it did not agree with the book's position "the attorney general decided that there is insufficient evidence to put the authors on trial for incitement to racism or incitement to violence."
The arrests and questioning of rabbis over the book last year led to violent protests by their supporters and a raging debate about whether the rabbis are above the law and the limits of religious freedom of expression.
The book reportedly says babies and children of Israel's enemies may be killed in certain circumstances since "it is clear that they will grow to harm us."
It also says that non-Jews are "uncompassionate by nature" and that attacks on them "curb their evil inclination."
"Anywhere where the influence of gentiles constitutes a threat to the life of Israel, it is permissible to kill them," the rabbis wrote.
The book has also drawn sharp criticism from many rabbis who say it contradicts the teachings of Judaism.