After a five-month investigation, the Marine Corps determined that the marine corporal fired in self-defence and will not face court martial, spokesman Lieutenant-Colonel T V Johnson said.
"The commanding general of the First Marine Division determined that the action of the Marine involved in the incident was pretty much consistent with the established rules of engagement and the law of armed conflict," Johnson told CBS Radio.
NBC News reported earlier that the decision was based partly on the fact that marines had been warned fighters were feigning death and booby-trapping bodies and that the corporal apparently feared for his life when he fired the shots.
Second incident investigated
The Marine was seen in images on the videotape that was shared with other news organisations. NBC said a second marine remains under investigation for shooting another unarmed man in the mosque.
The US military opened the investigation into possible war crimes after the incident was recorded by an NBC television crew embedded with the marines.
The Iraqi was one of five wounded left in the mosque after the marines fought their way into Falluja, then held by fighters.