The veteran police officer allegedly made the gesture over successive days in October 2024, one year after laws banning the salute came into force.
Attorney-General Sonya Kilkenny blasted the alleged behaviour but declined to reveal why the case had been dropped, saying it was up to others to explain.
"We expect the highest standards from our Victoria Police, this behaviour is entirely unacceptable and will not be tolerated," Ms Kilkenny told reporters in Ivanhoe on Thursday.
"The premier has been very clear on this and has taken a very firm position."
Attorney-General Sonya Kilkenny says it's up to others to explain why the case had been dropped. (Rachael Ward/AAP PHOTOS)
It was revealed on Wednesday Victoria Police's criminal case had ended after it received advice from the Office of Public Prosecutions there was "no reasonable prospect of conviction".
An internal discipline investigation has been launched and the sergeant remains suspended.
The state prosecutor's office did not explain the basis for its advice.
"The matter was reviewed carefully, thoroughly and objectively and it was determined that there are not reasonable prospects of conviction in this case," a spokesperson said in a statement.
The 65-year-old woman allegedly made the banned gesture at the Victoria Police Academy at Glen Waverley, in Melbourne's southeast, over two days in October.
She was accused of approaching two employees and performing the salute, as well as uttering the words "heil Hitler".
The following day, in a post-family violence scenario debriefing with a recruit squad and another instructor, the sergeant again allegedly performed the salute and said "heil Hitler".
She was interviewed and released without charge in the days following the alleged incidents, with the force revealing she was expected to be charged on summons.
At the time, Victoria Police Chief Commissioner Shane Patton labelled her alleged actions "appalling" and "abhorrent".
Dvir Abramovich says the reasons why the officer's charges were dropped must be fully explained. (Joel Carrett/AAP PHOTOS)
Anti-Defamation Commission chair Dvir Abramovich, who spent years lobbying governments to ban the public display of the salute and Nazi swastika, said he was shocked by the outcome given Mr Patton's previous remarks.
"This decision risks sending a dangerous and corrosive message - that some individuals, by virtue of their position, may be above the law," he told AAP.
Mr Abramovich said the "shameful" decision must be fully explained and made public, declaring Victorians had a right to know.
The Police Association of Victoria declined to comment on the latest development.
State and federal governments have banned Nazi symbols and gestures following concerns of rising anti-Semitism.
Far-right extremist and self-proclaimed "Hitler soldier" Jacob Hersant became the first Victorian found guilty of intentionally performing the Nazi salute in public in October.
He was sentenced to one month in prison but freed on bail pending an appeal, set for a three-day hearing from June 10.
In Victoria, performing the Nazi salute in public can carry a sentence of up to 12 months in prison and or a $23,000 fine if proven.
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