Lieutenant-General James Mattis, Camp Pendleton's commanding officer, dropped the charges after determining that "administrative measures" were an appropriate punishment, the Marine Corps said in a statement.
Fourth dismissal
This is the fourth time charges against US marines have been dropped in the Haditha case, the biggest criminal trial against US troops in the Iraq war.
In November 2005, 24 Iraqi civilians including women and children were killed after a marine was killed in a roadside bombing.
The Marine Corps said McConnell was granted immunity to speak with authorities and co-operate with "all parties" in the remaining Haditha prosecutions.
"Lieutenant-General Mattis determined that administrative measures are the appropriate response for any errors or omissions allegedly committed by McConnell," the statement said.
Military prosecutors had initially charged eight marines, including McConnell, Sergeant Sanick Dela Cruz, a key witness against alleged ringleader and quad leader Frank Wuterich, Lance Corporal Justin Sharratt and Captain Randy Stone.
'Whipping boy'
Kevin McDermott, McConnell's lawyer, said his client was the "public whipping boy" along with the other seven when the focus should be on military commanders who set the basic rules of engagement for US forces.
"You don't want the lance corporal, the 19-year-old kid with the M-16, thinking twice about pulling the trigger for fear that he'll end up being investigated if in fact he reasonably believes there are insurgents involved with the attack upon him," he said.
In a hearing this month, Wuterich admitted he shot some of the victims but in a proper response to attacks on marines.
"Engaging was the only choice – the threat had to be neutralised," he said about an initial fatal shooting of five Iraqi men near a car.
He and several other marines later cleared out two nearby homes, which resulted in another 19 deaths. He admitted telling his men to "shoot first and ask questions later".
The Haditha deaths, along with the Abu Ghraib prison abuses and other cases, sparked international anger over US treatment of Iraqis.