David Higgins, 76, was due to face trial in December over allegations that he sexually abused two boys at Knowl View in Rochdale but the Crown Prosecution Service (CPS) has announced it will now offer no evidence against him.
The CPS said the decision to discontinue the case was made following a review prompted by the receipt of “further information” last month.
Higgins, a convicted paedophile who is presently serving a custodial sentence, was the only person charged from an “extensive” Greater Manchester Police investigation - codenamed Operation Jaguar - launched following reports of both physical and sexual abuse at Knowl View from 1969 until it closed in 1995.
In 2014, Higgins was jailed for 14 years at Leeds Crown Court for historical sex offences committed on a pupil he taught at a primary school in Leeds after he left Knowl View. He was also imprisoned in 2002 for abusing two former Knowl View pupils.
In April this year, Higgins, of HMP Rye Hill, was charged with 18 counts of indecent assault and one count of attempted indecent assault between 1969 and 1971.
His trial was scheduled to begin at Manchester Minshull Street Crown Court on December 12.
A CPS spokeswoman said: “All cases are subject to continuous review by the CPS. A further review was conducted at the beginning of September following the receipt of further information.
“As a result it was decided that the evidential stage of the test, which must be considered under the Code for Crown Prosecutors, was no longer met. This decision to offer no evidence was taken after discussions with Greater Manchester Police.
“The complainants were informed of the decision on 18th October 2016. Those who represent the defendant were informed immediately thereafter.”
Assistant Chief Constable Debbie Ford said Operation Jaguar has been an “extensive and thorough investigation into which a significant amount of resources were invested”.
She added: “We recognise this will be a disappointing outcome for victims and we will continue to offer them support at what is, understandably, a very difficult time.
“I’d also like to pay tribute to the victims in this case. They have shown tremendous courage by coming forward and embarking on what has been a long and emotional journey.
“Victims are given specialist support throughout the process, no matter how long the criminal justice process takes, and we continue to offer support and refer them to specialist agencies.”
GMP had previously investigated allegations of child abuse at Knowl View and other care homes across Greater Manchester. Operation Cleopatra was launched in 1998 and lasted for six years before it led to the convictions of seven people.
Smith acted as a governor for several schools in Rochdale, including Knowl View, and when he was a town councillor was active on many committees involving youth activities.
Last month, police said that, since April 2012, a total of 29 people had made complaints about Smith with allegations including sexual assault and rape that took place between 1960 and 1987 at Knowl View and other locations in the town.
It added that the cases would not be taken any further as it said the CPS “does not make hypothetical charging decisions in respect of suspects that are now deceased”.
He was elected as a Liberal MP in 1972 and became a Liberal Democrat on the formation of the new party before leaving Parliament in 1992. He was knighted in 1988 and died aged 82 in 2010.
In November 2012, GMP stated that Smith abused young boys in the 1960s in his role as secretary of the Rochdale Hostel for Boys Association.
While in 2014, Rochdale MP Simon Danczuk, in his co-authored book Smile For The Camera: The Double Life Of Cyril Smith, said the 29-stone politician was left free to abuse children as young as eight despite 144 complaints by victims.
In the book, former social worker Martin Digan repeated his claims that in 1994 he discovered a report made three years earlier by a HIV prevention officer who warned Rochdale Council that boys aged eight to 16 at Knowl View were at risk of Aids.
Mr Digan said the report revealed that men travelled from as far away as Sheffield to visit the home and sexually abuse young boys.
Tony Lloyd, the Greater Manchester Police and Crime Commissioner, said: “I share the view of the victims of the horrific abuse at Knowl View that the lack of prosecutions after such a long period of time is a bitter pill.
“The Knowl View abuse scandal casts a long shadow across Greater Manchester. It is an indictment of how, in the past, public bodies and society as a whole treated the most vulnerable of children. It is shameful.
“The challenge for the current generation is to ensure that vulnerable children today are treated with respect and dignity, and, when victims of abuse come forward, they are taken seriously and the crimes against them fully investigated.
“I hope those at Knowl View who suffered abuse at the hands of those who should have protected them can at least take some comfort in the knowledge that exposing their ordeal from the past has helped protect children in the present and will in the future.”