Daniel Thomas, 28, who plays football for Port Talbot Town FC was arrested and released on bail after posting the homophobic tweet which ended in the hash-tag #teamHIV.
Mr Thomas and Port Talbot argued that he was the victim of misguided prank after leaving his phone unattended.
However, the director of public prosecution decided not to press charges as the tweet was deemed "not so grossly offensive that criminal charges need to be brought".
Keir Starmer QC, who is the most senior prosecutor in England and Wales, went on to say: "This was, in essence, a one-off offensive Twitter message, intended for family and friends, which made its way into the public domain.
"It was not intended to reach Mr Daley or Mr Waterfield, it was not part of a campaign, it was not intended to incite others and Mr Thomas removed it reasonably swiftly and has expressed remorse.
"Before reaching a final decision in this case, Mr Daley and Mr Waterfield were consulted by the CPS and both indicated that they did not think this case needed a prosecution."
Mr. Starmer also said that he planned to issue guidelines on social media usage so that such issues could be dealt with more swiftly and consistently.
"To ensure that CPS decision-making in these difficult cases is clear and consistent, I intend to issue guidelines on social media cases for prosecutors," he said.
"In the first instance, the CPS will draft interim guidelines.
"There will then be a wide public consultation before final guidelines are published.
"Social media is a new and emerging phenomenon raising difficult issues of principle, which have to be confronted not only by prosecutors but also by others including the police, the courts and service providers.
"The fact that offensive remarks may not warrant a full criminal prosecution does not necessarily mean that no action should be taken."