The underworld boss feared he would be prosecuted for the crimes after a high-profile police raid on his Costa del Sol home in May 2010,
But a judge investigating the Irishman and a gang of alleged accomplices including his two sons has decided to drop the allegations.
Kinahan, who was hauled back to a court in Estepona yesterday for further questioning, is now being probed only on suspicion of money laundering and membership of a criminal gang.
The dramatic decision, which a state prosecutor decided not to appeal against, will be seen as a major blow for the Spanish police and politicians.
Former Home Secretary Alfredo Rubalcaba branded the Kinahans a “mafia family” when Christy and sons Christopher and Daniel were arrested during a series of dawn raids on the Costa del Sol.
Nearly a dozen suspects were arrested in the UK and Ireland as part of the same Europol-coordinated police operation.
Rubalcaba, who has just been replaced as leader of Spain’s main opposition party, even linked the alleged gang ringleaders to a string of murders when he reacted to news of the arrests during a visit to Poland.
He said at the time: “This was an operation against an important, well-known mafia of organised crime, which has operated in different countries and which is being linked to various murders and with a number of crimes from drug trafficking to people trafficking.
“It is a mafia family relatively well-known in the United Kingdom, a little less known in Spain, but they are established on the Costa del Sol.”
Investigating judge Maria Carmen Gutierrez Henares is understood to have binned her drugs and weapons trafficking probe after finding no evidence linking Kinahan and his alleged accomplices to the crimes.
Christy and his sons and alleged right-hand man John Cunningham will remain on bail along with the other suspects while the secret court probe continues into the money laundering and criminal gang membership allegations.
Sources close to the long-running case predicted last night it could take at least two more years to reach trial - and the number of defendants in the dock would be a fraction of those originally arrested.
One insider said: “All the suspects including Christy Kinahan have been called back to court over the last three weeks to give evidence behind closed doors.
“Most said they had nothing to add to earlier statements.
“Christy KInahan attended court yesterday/on Wednesday but managed to get in and out of the building without anyone cottoning on to the fact it was him.
“He’s not surprised the drugs and weapons allegations against him have been dropped but he’s obviously very relieved.
“The judge took her decision around the same time she called the first of the suspects in for further questioning.
“Their defence lawyers are confident the money laundering charges are not going to prosper either.”
Another well-placed source added: “The suspects weren’t asked a single question about drugs or weapons.
“Most declined to add anything to their original statements.”
More than 20 people including the Kinahans were arrested on the Costa del Sol more than four years ago as part of Operation Shovel.
Christy, arrested at his luxury apartment in a private development near Estepona, spent six months on remand in jail before being bailed.
Armed officers sealed off a residential street after his detention before marching him into court.
Police said at the time the gang he is said to have led owned property worth 500 million euros in Brazil and 160 million euros in Spain.
The suspects had a fleet of expensive cars seized and bank accounts frozen