The force had launched a criminal investigation into gigs by Kneecap as well as punk-rap duo Bob Vylan, which took place one after another at Glastonbury's West Holts stage on day four of the June 25-29 festival.
In May, a member of Kneecap was charged with a terrorism offence for allegedly displaying at previous gig a flag of Hezbollah, the Iranian-backed militant group that is proscribed as a terrorist organisation in Britain. He denies the offence.
At Glastonbury the Belfast-based group led chanting against Prime Minister Sir Keir Starmer, while Bob Vylan's set included chants of "death to the IDF," a reference to the Israeli military.
Avon and Somerset Police said in a statement last week that they have decided to drop the investigation after consulting the Crown Prosecution Service.
"After that advice, we have made the decision to take no further action on the grounds there is insufficient evidence to provide a realistic prospect of conviction for any offence."
Police said inquiries were continuing over the Bob Vylan set.
Kneecap said the investigation was politically motivated.
"Every single person who saw our set knew no law was broken, not even close... yet the police saw fit to publicly announce they were opening an investigation," the group said on Instagram.
