The announcement by Attorney General Mohamed Apandi Ali capped months of uncertainty for Najib, who has been fighting intense pressure to resign over the financial scandal in his biggest political crisis since he took power in 2009.
Najib welcomed Apandi's decision. "He has confirmed what I have maintained all along: that no crime was committed," Najib said in a statement.
Questions remained, however, about the donation. Apandi did not say why the Saudi royals made the donation or what the money was to be used for.
He said an investigation by the country's anti-corruption agency showed no criminal offence had been committed because the $681 million transferred into Najib's accounts between March and April 2013 was "given without any consideration" by the Saudi royal family as a personal donation.
"I am satisfied that there is no evidence to show that the donation was a form of gratification given corruptly," Apandi said.
He said Najib returned $620 million to the Saudi royal family in August 2013 as the money wasn't utilized. He did not elaborate and did not say what happened to the remaining $61 million.
The anti-corruption agency met with witnesses including the donor, he said.
Apandi said no reason was given for the donation, which was a matter between Najib and the Saudi royals.
Najib, however, indicated that it was for political funding.
"I appreciate that political funding is a topic of concern to many people," he said in his statement. He said he planned to submit political funding reform proposals for discussion.
Najib called the controversy an "unnecessary distraction" for the country and said it was time to unite and move on.
"I will now redouble my focus on the key issues that matter to Malaysia, especially combating the threat of terrorism, and strengthening the economy in the face of global headwinds," he said?.
Najib has been grappling with deep unhappiness over his leadership, with large street rallies in August calling for his resignation after documents leaked in July suggested that about $700 million was deposited in his private bank accounts from entities linked to indebted state investment fund 1MDB.
Najib denied any wrongdoing and later said the money was a donation from the Middle East. Since then, he has replaced critics in his government with loyalists, sacked the previous attorney general who had been investigating him, and cracked down on the media.
Saudi government officials in Riyadh had no immediate comment about the investigation. It was not mentioned on the state-run Saudi Press Agency early Tuesday.
Opposition lawmaker Tony Pua slammed Apandi's decision, saying the fact that it was a personal donation did not rule out corruption.
Pua said Apandi provided no new or convincing information to support his decision.
The scandal started with investigations into 1MDB, which was set up in 2009 by Najib to develop new industries but it amassed 42 billion ringgit ($9.8 billion) in debt. Critics have long voiced concern over its massive debt and lack of transparency. Najib still chairs its advisory board.
The political scandal contributed to the Malaysian currency plunging to a 17-year low last August.
Apandi also cleared Najib of graft at government-owned SRC International, a firm linked to 1MDB, over another 42 million ringgit ($9.8 million) from SRC that was deposited into Najib's account between December 2014 and February 2015.
He said there was no evidence to show Najib was aware of the money transfer, or that he had given his approval. Apandi said Najib had thought that all payments made from his accounts came from the donation by the Saudi royal family. No further details were available.
Support for Najib's ruling coalition has eroded in the last two general elections. It won in 2013, but lost the popular vote for the first time to an opposition alliance.
(AP)