The peer resigned in July after being filmed by the Sun allegedly taking drugs in the company of prostitutes.
The case led to calls for reform of the House of Lords.
The BBC's home affairs correspondent Danny Shaw said the Met Police had closed its inquiry as there was "insufficient evidence to proceed".
The police raided a property in central London during their investigation, which was prompted by a complaint made about Lord Sewel's conduct.
Scotland Yard said in a statement: "The Met launched a criminal inquiry into allegations of drug-related offences involving a member of the House of Lords on Monday, 27 July.
"The investigation, led by officers from the Special Enquiry Team of the Homicide and Major Crime Command, has now concluded.
"Following a review of all the material, including a forensic examination of an address in central London, there is insufficient evidence to proceed with this investigation and the matter is now closed."
Danny Shaw said the decision had seemingly drawn a line under the episode.
Following the expose, Lord Sewel, 69, quit as deputy speaker of the Lords and chairman of the Lords Privileges and Conduct Committee, then quit Parliament altogether.
In a statement to parliamentary officials announcing his resignation, he apologised for the "pain and embarrassment" caused and said his exit would "limit and help repair" the damage to the reputation of the Lords.
The police are to take no action against Lord Sewel over allegations of drug use which led to him quitting the House of Lords.