TOKYO—Ichiro Ozawa, a powerful top official of Japan's ruling party, won't face criminal charges by prosecutors investigating his fund-raising activities, ending one chapter of a political drama that has eroded the popularity of Japan's new government and raised questions about its staying power.

After weeks of intense investigation into Mr. Ozawa's fund-raising organization, prosecutors Thursday said they wouldn't charge the secretary-general of the Democratic Party of Japan, citing "unsubstantiated suspicion." The decision will likely allow Mr. Ozawa, known for his expertise in winning elections, to stay in his job to lead preparations for a national vote in July, a key event for the center-left DPJ to solidify its grip on power.

Ichiro Ozawa, at DPJ headquarters on Thursday, apologized about developments in the case but said he will continue in his party job. Agence France-Presse/Getty Images

While the prosecutors' decision allows the DPJ to avoid the immediate threat of losing its top strategist, the drama isn't expected to end soon. The scandal has hurt the popularity of the five-month-old administration of Prime Minister Yukio Hatoyama—recent polls show the public is increasingly critical of Mr. Ozawa's fund management, which is dragging down the administration's public-support ratings.

The scandal has dominated news coverage and deliberations at parliament over the past few weeks, just as the DPJ was beginning to escalate debate on important policy issues such as economic recovery. The DPJ needs to win July's upper-house election to avoid political paralysis as the administration tries to keep the weak economic recovery on track without further increasing the budget deficit.

The opposition party, the Liberal Democratic Party, has vowed to keep up its criticism of the DPJ, even suggesting it might stall parliamentary debate on the budget.

Prosecutors did indict three of Mr. Ozawa's close associates, who had been arrested last month. They are accused of violating the nation's political-funds law by falsifying financial documents related to the purchase of a Tokyo property in 2004.

Among the indicted were Tomohiro Ishikawa, a 36-year-old lower-house member and former caretaker of Mr. Ozawa's fund organization, and Takanori Okubo, Mr. Ozawa's chief aide. Mr. Ishikawa now faces pressure from both inside and outside of Mr. Hatoyama's government to step down as a lawmaker. Representatives for Messrs. Ishikawa and Okubo weren't available to comment.

At a news conference following the prosecutors' announcement, Mr. Ozawa apologized about the developments but said he would continue with his job. "I would like to win the understanding of Japanese citizens by working as a member of parliament to stabilize their lives by passing the national budget, and would like to fulfill my responsibility of aiming for a majority" in the coming elections, he said.

According to a poll conducted by the Nihon Keizai Shimbun business daily last week, the ratio of respondents who approved Mr. Hatoyama's cabinet was just 45%, sinking below the ratio of those who disapproved, at 47%, for the first time.

Worried that the scandal would hurt the party even more ahead of the July elections, some in his own party have expressed dissatisfaction with Mr. Ozawa's handling of the scandal and even called for his resignation, echoing calls from the opposition party.

"We can't say everything is OK as long as he didn't break the law," Kozo Watanabe, a senior DPJ lawmaker, said earlier this week. "After all, he is a leader of the people."

Others, like Mr. Hatoyama, rallied behind Mr. Ozawa, whose skills as an election strategist are seen as essential for the DPJ to defend and increase its seats in parliament. "At this point, I would like to see Mr. Ozawa continue with his job as secretary-general," Prime Minister Hatoyama said Thursday.

Since the arrest of his aides in mid-January, the 67-year-old Mr. Ozawa had denied involvement in any illegal activity and promised a "showdown" with prosecutors. Mr. Ozawa, with a reputation as a behind-the-scenes power broker, is a protégé of two powerful postwar political leaders—Kakuei Tanaka and Shin Kanemaru, both of whom had brushes with prosecutors.

Mr. Ozawa claims a partial victory in his encounters with the Tokyo District Prosecutors Office. Since late January, prosecutors had questioned Mr. Ozawa twice but didn't find evidence to prove he was actively involved in falsifying documents. The prosecutors also apparently weren't able to build a case supporting their earlier claim that part of the 400 million yen ($4.4 million) spent to purchase the property were illegal donations from construction companies seeking to win public works orders, according to the Japanese media.

—Takeshi Takeuchi contributed to this article.

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