However, in a statement released from the Marines Camp Pendleton base outside San Diego, the military said charges against Tatum had been dismissed "in order to continue to pursue the truth seeking process into the Haditha incident".
In a statement, Jack Zimmerman, a defence lawyer, denied that Tatum had struck a deal with prosecutors that would see him testify against Frank Wuterich, a fellow marine, in exchange of immunity.
Wuterich, a staff sergeant, is accused of being the ringleader and faces court-martial on nine counts of voluntary manslaughter later this year.
No 'testimony deal'
"We emphasise that lance corporal Tatum will testify truthfully if called as a witness, but there is no deal for his testimony," Zimmerman said.
"It became clear to the experienced prosecution team that the right thing to do was to dismiss all charges.
|"We believe the evidence shows that lance corporal Tatum reacted to an enemy attack the way he was trained to do" |
Jack Zimmerman, defence lawyer
"We believe the evidence shows that lance corporal Tatum reacted to an enemy attack the way he was trained to do," he said.
Tatum was due to face trial for shooting dead two unarmed children when marines cleared houses near the scene of a deadly roadside bombing in Haditha, 260 kilometres west of Baghdad, on November 19, 2005.
Four soldiers were initially charged with murder and four officers accused of covering up the incident.
Immediately after the violence the marines said in a press statement that 15 Iraqis and a US marine had been killed as a result of the roadside bomb.
An investigation by Time magazine later found that most of the casualties were killed when marines swept through three houses near the site of the bombing.
The findings prompted a wide-ranging internal investigation.
However, since charges against the eight marines were first announced in December 2006, prosecutors have struggled to make the allegations stick.
In Wuterich’s case, charges of murder were later replaced by the lesser offence of manslaughter.
The military investigator overseeing Tatum's pre-trial hearing had recommended that charges against Tatum be dismissed on the grounds that he shot at the children because Wuterich had started firing.
"I believe Tatum's real life experience and training on how to clear a room took over, and his body instinctively began firing while his head tried to grasp at what and why he was firing," Paul Ware, a lieutenant colonel, said.
"By the time he could recognise that he was shooting at children, his body had already acted."
Meanwhile Mark Zaid, a lawyer for Wuterich, said the dismissal showed that "there are tremendous holes" in the case.
"The prosecution couldn't afford to have Tatum acquitted. So by dismissing the charges and turning him as a witness they will attempt to blame it all on staff sergeant Wuterich," Zaid told reporters on Friday.
"They reached an early, rush-to-judgement conclusion that Wuterich was this rampaging murderer. But the truth is that the facts don't support that."
The killings in Haditha are the most serious allegations of war crimes leveled at US forces since the US-led invasion of Iraq in 2003.
The case is one of several involving marines from Camp Pendleton.