Gerhard Sommer, a former company commander of a mechanized infantry division, had been accused over the Nazis' mass murder of 560 civilians in the Tuscan mountain village of Sant'Anna di Stazzema in 1944.
The prosecutors in the northern German city of Hamburg said that - had the man been deemed fit to stand trial - he would "with high probability have been charged with 342 cases of murder, committed cruelly and on base motives".
On August 12th 1944, Nazi soldiers using machine guns and flamethrowers massacred almost all residents and refugees in Sant'Anna di Stazzema, including 107 children under 14 years.
After decades of judicial inertia in Germany and Italy, the case resurfaced in the 1990s based on research by several historians.
In 2005, an Italian military court found that ten members of the 16th SS "Reichsfuehrer" division, including Sommer, were personally responsible for the massacre and sentenced them to life in absentia.
In Germany prosecutors in the city of Stuttgart initially investigated 17 of the former SS soldiers.
But a decade later, in 2012, when only eight of them were left alive, it was found there was insufficient evidence to hold any of them personally responsible for the bloodbath.
But a court in Karlsruhe in 2014 overturned the decision in the case of Sommer, saying there was no doubt he had advance knowledge of the mass killing of civilians.
Hamburg prosecutors took on the case, but Thursday said that Sommer's advanced state of dementia attested by experts meant that he would not have been able to address the court and merely a passive "object of public prosecution".