The case had been under consideration by the Crown Prosecution Service for months following a formal complaint about the effigy by the Commission for Racial Equality.
There was a general view among most bonfire societies in the county that Firle's effigy - prompted by an unwanted visitation by travellers last year - had gone too far, but that prosecution was unwarranted.
Bonfire's tradition of using effigies to make an emphatic point to the rest of the world was considered by some to be under threat.
The CPS decision was welcomed by a spokesman for Lewes Bonfire Council, MP Norman Baker, and by the Firle members themselves.
The issue hit the headlines after a local woman Patricia Knight took exception to the firing of a caravan with cartoon faces at the windows and a stark message about Pikeys.
She voiced her concerns to the media, and the matter was taken up by the CRE and a support organisation for travellers. Ms Knight later said that she did not want to see the bonfire society members prosecuted.
The 12 members of the society were arrested and released on police bail in mid November and the threat of court action has hung over them ever since.
As well as focussing national attention on the traditions of Bonfire in Sussex, the case brought under closer scrutiny the problems arising from travellers setting up camp in inappropriate areas, and the laborious procedures required to move them on.
Debate around the case also underlined the inadequate provision of sites for travellers in East Sussex and in the country in general.