At the same time, Home Secretary Theresa May announced plans to allow judges, rather than government officials, to make extradition decisions, The Daily Telegraph reported.
May's decision ends a 10-year legal battle by U.S. officials to have Gary McKinnon, 46, sent to the United States for trial.
May said there was "no doubt" McKinnon was seriously ill.
Psychiatrists appointed by the Home Office who examined McKinnon said they thought he would commit suicide if he were sent to the United States.
He suffers from Asberger's syndrome and hacked the U.S. computers from his home in north London, looking for evidence of extraterrestrial visitation.
May said extraditing him would have violated his human rights.
British prosecutors will now decide if McKinnon will face charges in England.
A succession of home secretaries had said they did not have the power to stop McKinnon's extradition. However, May said decisions on future requests for extradition would be transferred to the courts.
Her proposal says judges could prohibit overseas prosecutions "if they believe it is in the interests of justice to do so," May said.
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