Denis O'Connor, a builder from Kilkenny, had claimed he received a call from Seamus Daly around 20 minutes after the bomb detonated on August 15, 1998.
The claim was crucial to the case, as the call made to Mr O'Connor was from a phone prosecutors believed was used by one of the Omagh bombers.
Phone mast evidence had tracked two mobiles on an apparent journey from the Republic to Omagh and back again. The prosecution claimed these were phones used by the bombers.
If Mr O'Connor could identify Daly as the man on the end of one of those phones then the prosecution had a chance of success, Crown lawyers believed.
But the case never reached the floor of the Crown Court because many inconsistencies emerged when O'Connor's evidence was tested before a magistrate last week.
District Judge Peter King was presiding over a committal hearing in Omagh Magistrates' Court to determine whether the case against Daly was of sufficient strength to warrant trial.
The hearing was subject to reporting restrictions but now the prosecution has collapsed the details can be made public.
A number of holes emerged in O'Connor's evidence when he was challenged under intensive cross-examination by Daly's defence barrister Brenda Campbell.
His admission that the call he believed was from Daly may actually have been made a week prior to the Omagh bomb effectively holed the prosecution case below the water line.
A contradiction over whether or not he had ever met another man successfully sued for liability for the Omagh bomb - Dundalk-based publican and building contractor, Colm Murphy - also undermined the Crown case.
After reviewing 173 pages of Mr O'Connor's court deposition over recent days, Director of Public Prosecutions Barra McGrory decided the evidential test for prosecution was no longer met.
Another eight witnesses had been due to take to the stand during the committal hearing in Omagh but they never got the chance.
The prosecution case against Daly had fallen at the first hurdle.
Victims' campaigner Michael Gallagher said he agreed with the decision to drop the trial.
Mr Gallagher said: "This was a difficult case and hinged on the testimony of one individual and that one individual did not seem to be up to meeting the test needed to put someone behind bars.
"For that reason I agree with the decision, regrettably, that happened today.
"There was no other option for the Public Prosecution Service or the judge but to deliver the verdict that we have just heard."
Seamus Daly was once described by a High Court judge as a Real IRA foot soldier and the evidence linking him to the dissidents' Omagh bombing was described as overwhelming by one of Northern Ireland's most senior judicial figures during a claim for damages by grieving relatives.
The bricklayer's militant republicanism stretches back to at least 2004 when he was sentenced to three and a half years in prison in the Republic after admitting membership of the outlawed Real IRA which carried out the Omagh attack.