The pair - aged 16 and 18 - were due to be committed for trial next week for the murder of Mr Lawrence, who was studying for A-levels.
They were brought before the New Thames Youth Court in east London for a special hearing yesterday where the CPS announced that it was discontinuing proceedings.
Mr Lawrence, from Eltham in south-east London, was stabbed to death at a bus stop on 22 April after he was allegedly surrounded by a gang of white youths. His murder sparked off anti-racist demonstrations all over the capital.
A CPS spokeswoman said: 'All cases are kept under continuous review and after careful consideration of the available evidence in this case, we have decided there is insufficient evidence to provide a realistic prospect of conviction.'
It is possible for charges to be reinstated against the teenagers at a later date. The police murder inquiry is continuing.
Police described the incident as racially motivated because of remarks made before the stabbing and said it was an 'outrageous and senseless' attack.
Mr Lawrence, who wanted to become an architect, was with a friend waiting to catch a bus home when they were set on by a group of four to six white youths. Fatally wounded, he managed to run 250 yards before collapsing on the pavement. He died in hospital soon afterwards.
His parents, Neville and Doreen, are currently in Jamaica, where they took his body to be buried earlier this month.
They have continued to endure racial harassment since the murder and are considering emigrating to the Caribbean. At their son's funeral in Woolwich last month, 700 mourners heard Mr Lawrence demand the closure of the British National Party's offices in nearby Welling.
The BNP has been accused of stirring up racial violence in the area. Mr Lawrence was the fourth black person to be killed in south-east London in similar circumstances in two years.
The Anti-Racist Alliance, which has criticised the police inquiry, condemned the decision to drop the charges and said it would be pressing for his killers to be arrested, charged and convicted. Marc Wadsworth, its national secretary, said the ARA would be holding a picket outside the London headquarters of the CPS from noon today.
Peter Bottomley, the Conservative MP for Eltham, is also to ask the CPS for a fuller explanation of its decision to drop the charges.
Scotland Yard refused to comment on the CPS decision to discontinue proceedings but said 'the murder hunt will continue'.Reuse content