The Director of Public Prosecutions Keir Starmer said the wording of the guidelines issued by the House authorities had presented prosecutors with a "very real difficulty" in bringing a case.
However the Clerk of the Parliaments Michael Pownall - the most senior official in the upper House - insisted tonight the guidance was intended for purely internal use and did not relate to any possible breach of the criminal law.
He said the Lords would now be re-opening their own inquiry into Lady Uddin's expenses. The investigation was originally suspended last year while Scotland Yard carried out its investigation.
The peer faces allegations she claimed tens of thousands of pounds in overnight allowances for staying in London on Lords business, after designating a flat in Maidstone, Kent, as her main home, even though she rarely visited it.
Announcing the decision not to bring charges, Mr Starmer said there was no definition in either legislation or the House of Lords expenses scheme itself of a peer's "only or main residence".
He said in a statement issued last November, Mr Pownall had said it was up to peers to designate their main home "as they see fit", while in further guidance in February he suggested that visiting a property once a month while the House was sitting was sufficient to qualify.
"On that interpretation, in any criminal proceedings, it would almost inevitably be necessary for the prosecution to prove, to the criminal standard, that any peer in question had not even visited the address they deemed their 'only or main' residence once a month," he said.
"That presents a very real difficulty and we considered whether it would be open to the Crown Prosecution Service to advance a different definition of 'only or main residence' in any criminal proceedings. However, after careful consideration, we concluded that such a course would not be open to us."
However Mr Pownall said the February guidance was issued for the purposes of his own internal investigation and "did not relate to potential breaches of the criminal law".
He added that as the guidance was issued in relation to residency in a property, any visit would have to include an overnight stay in order to qualify.
"Only visiting the residence once a month would not be sufficient for the designation (as a main home) to be appropriate and a visit must include an overnight stay," he said.
Earlier Lady Uddin expressed her relief that the threat of prosecution had now been lifted in a statement to reporters outside the house in Shadwell, east London where, it has been alleged, she actually stays for much of her time.
"I am relieved this ordeal has finally come to an end and I only wish now to say thank you to everyone who supported me through a very difficult time and I now wish to return back to my professional life," she said.
Mr Starmer said in the course of the Scotland Yard investigation, evidence had been obtained from her neighbours in Maidstone and from companies supplying utility services, such as water, gas and electricity.
However, lawyers at the Crown Prosecution Service had concluded it was still not sufficient to bring charges.
"After careful scrutiny of all of the available evidence, we have decided that, in applying the definition of 'only or main residence' adopted by the House Committee, there is insufficient evidence to bring criminal charges against Baroness Uddin and we have today advised the Metropolitan Police to take no further action," he said.
Yesterday, three Labour MPs and a Conservative peer appeared at a magistrates' court in Westminster to face charges over their parliamentary expenses.
Labour MPs David Chaytor, Elliot Morley and Jim Devine, along with Tory peer Lord Hanningfield, were remanded to appear at Southwark Crown Court where a judge will decide whether their case should be tried by a jury.
It was also reported this week that a fourth Labour MP, Harry Cohen, was being investigated by police after claiming more than £70,000 in second homes allowance when for much of the time his designated main home was being rented out.
In a response later, Mr Starmer said: "A statement made by Mr Pownall on February 9 set out the views of the House Committee on the issue of 'only or main residence'.
"This was deliberately published on the Parliamentary website with the following comment: 'The House Committee has decided to make the minute of its discussion on this issue publicly available.'
"It is therefore absurd to suggest, as Mr Pownall seeks to do in his statement issued on 12 March, that this was an internal document which the investigators and prosecutors should not have taken into consideration.
"This would be used as compelling evidence by any defence team and the CPS had to take that into consideration.
"It would have been unacceptable to consider instigating criminal charges against a person if in doing so the CPS had ignored a statement from the House Committee which had deliberately been made publicly available and which could be interpreted in favour of a suspect.
"The third report published on 10 March is a prospective document and contains proposals for future conduct.
"It therefore has no relevance to previous conduct by peers."
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