The Manchester United manager was accused of indecently assaulting 21-year-old Nadia Abrahams in her car after leaving a jazz club at 2am.
South African officials have branded the claims as "ridiculous"
"We feel our time and everybody else's has been wasted," said Sipho Ngwema, a spokesman for the National Director of Public Prosecutions. "There are no grounds for prosecution."
Ngwema says prosecutors will decide on Monday whether to take action against Abrahams. "We will look at it in due course," he said.
In an interview with The Mail on Sunday, Abrahams accused Ferguson of "repeatedly squeezing her thigh" as she drove him to his hotel. She says this caused her to swerve off the road and puncture a tyre on the curb.
Ferguson issued a strong denial of the allegations against him and called them "entirely without foundation."
"I would like to make it clear that any allegations of improper conduct, let alone sexual assault, on my part are untrue and entirely without foundation," Ferguson said in a statement.
He says the young woman and her boyfriend invented the story in order to sell it to British newspapers.