Legislation will be developed to shut the office, which was established to bring criminal charges over the use of barrister Nicola Gobbo as a police source during Melbourne's gangland war.
Special investigator and former High Court justice Geoffrey Nettle said the continuation of his probe would be a waste of time because of constant rejections from Director of Public Prosecutions Kerri Judd.
Ms Judd defended the decision not to lay charges, saying her rejection of three evidence briefs was based on the reasonable prospect of a guilty verdict.
The office was established in 2021 after a multi-million dollar royal commission into the Gobbo affair.
Attorney-General Jaclyn Symes said the government was acting on Mr Nettle's advice and that of the royal commission implementation monitor.
"I would like to thank Geoffrey Nettle for his work and wish him well for the future," she said on Tuesday.
"Prosecutorial decisions are a matter for the DPP and it is critical the Office of Public Prosecutions operates independently of government and statutory bodies like the OSI."
The office has received more than $25m from the state government on top of $39.5m allocated to the royal commission and $64m spent by Victoria Police defending the case.
Ms Gobbo was a popular gangland lawyer in Melbourne during the early 2000s while also acting as a police informant.
The royal commission into the scandal found her dual role could have affected over 1000 convictions.
Three have since been quashed, including for high-profile figures Tony Mokbel and Faruk Orman.
Criminal defence lawyer Ruth Parker, who led a 10-year battle to free Mr Orman, said the decision to disband the special investigator's office reflected an astonishing lack of moral judgment.
"It also fails to take into account the corruption that occurred in our criminal justice system involving at least one criminal lawyer and a number of police (which) is, as far as I know, unprecedented in the Western world," she told AAP.
"It is an atrocious example of corruption spanning years and to expend so much money and time investigating only to disband the OSI rather than consider prosecutorial power in its hands or appoint a special prosecutor independent of both the DPP and the OSI, is both cowardly and a sanctification of police corruption."
Police corruption, Ms Parker said, was being allowed to happen in Victoria.
"We have a High Court judge calling it out and saying there's enough evidence," the Galbally Parker principal lawyer said.
Shadow attorney-general Michael O'Brien said the government was giving a free pass to all those accused of perverting the course of justice.
"The worst legal scandal in Victorian history will end with a whimper because a weak Labor government does not want to give the OSI the power to authorise charges," he said.
The Office of Public Prosecutions, Victoria Police, Police Association and Victorian Bar declined to comment.
Staff within the office will be supported by the state government.
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