By letting the case go now, authorities could still pursue the charge again in the future if it discovers new evidence.
Police arrested Donaghy in December after he allegedly threatened a man with a hammer.
TMZ Sports obtained the 911 call from the incident. Donaghy told the emergency operator he had gone to another house to get his daughter, who was "stoned out of her mind" after using marijuana.
Donaghy then said the homeowners were arguing with him and that if one of them approached him he "[would] crack him right in his f--king head" with the hammer he was holding.
Police then arrived on the scene and arrested Donaghy.
Donaghy worked as an NBA referee from 1994 to 2007. The FBI discovered in 2007 the 51-year-old had bet on NBA games, including games he officiated.
A federal judge sentenced him to 15 months in prison in July 2008 after he pleaded guilty to conspiracy to engage in wire fraud and transmitting betting information through interstate commerce.