Chief prosecutor to investigate claims that prime minister influenced bank sale.
The two businessmen never submitted formal bids for the sale, and Olmert has denied wrongdoing in the case.
Police interrogated Olmert for a total of nine hours in two sessions at his official Jerusalem residence in October.
On Thursday, investigators concluded that there was insufficient evidence to indict the prime minister.
Micky Rosenfeld, a police spokesman, said: “There are no grounds for pressing charges against Olmert in the Bank Leumi case.”
Their conclusions were forwarded to Meni Mazuz, the attorney general, who will make the final decision on whether to indict.
Legal commentators say Mazuz’s decision is expected to take months, though it is unlikely he would proceed with a prosecution.
The police decision came hours after Olmert returned to Israel from the Annapolis Mideast peace summit in the US where he agreed to relaunch formal peace talks with the Palestinians.
Police had originally planned to issue their recommendation earlier this week, but put it off because of the summit.
Olmert’s office declined to comment, but his troubles are far from over.
Earlier this year, an initial government report into last year’s war in Lebanon was highly critical of his performance.
Although his popularity has begun to recover, a second report is expected in the coming weeks.
A damaging report would weaken him politically and could put pressure on him to step down.
He also faces two more police investigations.
In one, he is accused of buying a Jerusalem home at a substantial discount in exchange for arranging construction permits for the seller.
In a separate case, police are examing whether Olmert steered a lucrative government grant to a political supporter while he was trade minister.