Stevens was convicted last year of lying on a Senate disclosure form in order to hide $250,000 in gifts he received from an oil company executive and friends.
Only after the conviction did allegations of FBI misconduct come to light. The judge in the case has repeatedly delayed sentencing Stevens, and at one point he held prosecutors in contempt. Justice Department officials later replaced the trial team.
Stevens sought to dismiss the case, and Wednesday's action in effect supports his request. A hearing has been set for April 7.
In a written statement released Wednesday morning, Stevens suggested he would have fared better in his losing November election had it not been for the "unfair" case against him.
"I always knew that there would be a day when the cloud that surrounded me would be removed. That day has finally come," Stevens said. "It is unfortunate that an election was affected by proceedings now recognized as unfair. It was my great honor to serve the state of Alaska in the United States Senate for 40 years."
Holder said he would not seek a new trial.
"After careful review, I have concluded that certain information should have been provided to the defense for use at trial. In light of this conclusion, and in consideration of the totality of the circumstances of this particular case, I have determined that it is in the interest of justice to dismiss the indictment and not proceed with a new trial," Holder said in a statement released shortly after the motion was filed Wednesday.
Holder reportedly decided Tuesday to dismiss the original indictment rather than proceed to more hearings that might embarrass the department.
"Given what has happened in this case, it's not surprising" that charges against Stevens are being dropped, a source close to the case told FOX News.
Stevens' attorneys claimed the government "disregarded the Constitution" by going through with the prosecution but praised both Holder, the new prosecutorial team and Judge Emmett G. Sullivan for demonstrating integrity in the case.
"The misconduct of government prosecutors, and one or more FBI agents, was stunning. Not only did the government fail to disclose evidence of innocence, but instead intentionally hid that evidence and created false evidence that they provided to the defense," said attorneys Brendan V. Sullivan Jr. and Robert M. Cary.
"Had Judge Sullivan accepted the word of government prosecutors as is done often in our courts, the extraordinary misconduct would never have been uncovered, and the trial verdict might have survived appellate review. Judge Sullivan prevented such a tragic outcome. ...
Attorney General Eric Holder, too, should be commended. He is a pillar of integrity
in the legal community, and his actions today prove it," they said.
The motion says the Department of Justice only "recently" discovered that Bill Allen -- the prosecution's star witness and an oil executive whose former company, Veco Corp., paid for some of the improvements to Stevens' home in Alaska -- was interviewed on April 15, 2008, but the defense never knew about it.
The motion states that "no memorandum of interview or agent notes" were written after the interview and that a response from Allen regarding a note dated Oct. 6, 2002, was inconsistent with his testimony during trial.
Thus, the motion says, "this information could have been used by the defendant [during trial] to cross-examine Bill Allen and in arguments to the jury."
In the motion, the Justice Department says: "Given the facts of this particular case, the government believes that granting a new trial is in the interest of justice," but, "the government has further determined that, based on the totality of circumstances and in the interest of justice, it will not seek a new trial."
Alaska Sen. Lisa Murkowski said she was happy with the news, but troubled by the implication.
"I was pleased with the news that the Justice Department will drop all charges against Senator Ted Stevens, but I am deeply disturbed that the government can ruin a man's career and then say 'never mind.' There is nothing that will ever compensate for the loss of his reputation or leadership to the State of Alaska," she said.
Sen. Mark Begich, D-Alaska, who beat Stevens in the November election, released a statement saying the end to prosecution is "reasonable."
"I always said I didn't think Senator Stevens should serve time in jail and hopefully this decision ensures that is the case. It's time for Senator Stevens, his family and Alaskans to move on and put this behind us," the former Anchorage mayor said.
In addition to Stevens' age -- he's 85 -- and the fact that he is no longer in the Senate, sources told National Public Radio that Holder wants to send a strong message to prosecutors that misconduct will not be tolerated.
Holder said in his statement that the Justice Department's Office of Professional Responsibility will review the prosecution of Stevens' case, but no conclusions should be drawn.
"This does not mean or imply that any determination has been made about the conduct of those attorneys who handled the investigation and trial of this case," Holder said.
FOX News' Mike Levine contributed to this report.