Lohan, 26, was accused of leaving the scene of an accident after allegedly hitting a pedestrian with a Porsche outside The Dream Hotel in Manhattan last month.
TMZ said the "Mean Girls" and "Freaky Friday" star had been scheduled to appear in court Tuesday, but prosecutors decided to drop the case against the actress.
The celebrity news website cited an unnamed source as saying Lohan is "ecstatic" about the dismissal, but plans to sue her accuser for defamation.
Lohan's once-bright career has been eclipsed in recent years by reports of her erratic behavior, family disputes, substance abuse and legal troubles. She will next be seen in Lifetime's Elizabeth Taylor bio-picture "Liz & Dick."