Liam Óg Ó hAnnaidh, whose stage name is Mo Chara, was accused of having waved the flag of the banned militant group during a November 2024 gig.
The charge was thrown out in September after a court ruled it had originally been brought without the permission of the Director of Public Prosecutions and the Attorney General.
The Crown Prosecution Service said it would challenge the ruling but London's High Court rejected its appeal on Wednesday, meaning the case cannot proceed.
The CPS said in a statement that it accepted the High Court's ruling.
Kneecap - known for their politically charged lyrics and support for the Palestinian cause - have previously said the case was an attempt to distract from what they described as the United Kingdom's complicity in Israel's genocide in the Gaza Strip.
Israel strongly denies committing a genocide.
Ó hAnnaidh was charged in May with displaying the Hezbollah flag in such a way that aroused reasonable suspicion that he supported the banned group, after footage emerged of him holding the flag on stage while saying "Up Hamas, up Hezbollah".
Hamas is the militant Palestinian group that has ruled the Gaza Strip since 2007, and which Israel has been seeking to destroy during its two-year war that ended with a fragile ceasefire in October 2025.
Kneecap have previously said the Hezbollah flag was thrown on stage during their performance and that they "do not, and have never, supported Hamas or Hezbollah".
Ó hAnnaidh said in a statement: "This entire process was never about me, never about any threat to the public and never about 'terrorism' ... It was always about Palestine and about what happens if you dare to speak up."
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