The case cost Stevens the Alaska seat he had held since 1968.
"I always knew that there would be a day when the cloud that surrounded me would be removed," Stevens said in a statement. "That day has finally come. It is unfortunate that an election was affected by proceedings now recognized as unfair."
A week after his conviction, Alaskans voted by a narrow margin to oust Stevens in the November election. The patriarch of Alaska politics since before statehood, Stevens, 85, also was the longest serving Republican senator.
He appealed his conviction and had been awaiting sentencing.
Stevens was convicted of seven felony counts of lying on Senate financial disclosure forms to conceal hundreds of thousands of dollars in gifts and home renovations from a wealthy oil contractor.
The trial was beset by government missteps, which continued even after the guilty verdict was read. The trial judge grew so infuriated he took the unusual step of holding the Justice Department in contempt.
In court filings, the Justice Department admitted it never turned over notes from an interview with the oil contractor, who estimated the value of the renovation work as far less than he testified at trial.
"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 Wednesday. He said the department must ensure that all cases are "handled fairly and consistent with its commitment to justice."
The Justice Department is seeking to have the indictment against Stevens dismissed. If U.S. District Judge Emmet Sullivan agrees, Stevens' conviction would be vacated. The judge has scheduled a hearing for Tuesday.
Stevens' attorneys praised Attorney General Eric Holder as "a pillar of integrity" for his decision to disregard a jury verdict that they said was obtained unlawfully.
"In essence, the government tricked the jury into returning a tainted verdict against the senator based on false evidence," Stevens' lawyers Brendan Sullivan Jr. and Robert Cary said in a statement.
"This case is a sad story and a warning to everyone. Any citizen can be convicted if prosecutors are hell-bent on ignoring the Constitution and willing to present false evidence," their statement said.
In December, Stevens asked a federal judge to grant him a new trial or throw out the case, saying his trial had many deficiencies.
Judge Sullivan held Justice Department lawyers in contempt in February for failing to turn over documents as ordered. He called their behavior "outrageous."
The judge had ordered Justice to provide the agency's internal communications regarding a whistle-blower complaint brought by an FBI agent involved in the investigation of Stevens. The agent objected to Justice Department tactics during the trial, including failure to turn over evidence and an "inappropriate relationship" between the lead agent on the case and the prosecution's star witness.
The decision was first reported Wednesday by National Public Radio.
William Canfield, a former Stevens staffer and longtime friend, said the trial's effects may never be undone. He said Democrats used the taint of Stevens' legal problems as a campaign issue not just in Alaska, but in election challenges to his friends and allies, including Republican Sens. John Sununu, who was defeated, and Norm Coleman, whose close race is still being decided in court.
Sen. Mark Begich, the Democrat who won Stevens' seat, called the decision to drop the case "reasonable."
"I didn't think Senator Stevens should serve time in jail and hopefully this decision ensures that is the case," Begich said in a statement.
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Associated Press Writer Matt Apuzzo contributed to this report.
(Copyright 2009 by The Associated Press. All Rights Reserved.)
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