Montgomery County prosecutors yesterday dropped charges against Horace Butler, the Washington carpenter accused of helping carry out the July assassination of Iranian exile leader Ali Akbar Tabatabai.

State's Attorney Andrew L. Sonner said the charges of conspiracy to commit murder and being an accessory to the crime were dropped after a review of the case against Butler showed there was insufficient evidence for a conviction. However, the case against Butler is not closed.

Last Friday a D.C. Superior Court judge issued a warrant charging Butler with conspiracy within the District of Columbia to assist in the murder and with larceny in connection with the theft of a mail truck used in the assassination. Butler was taken from the county detention center to Washington, where he will appear today in Superior Court on a bond hearing. Tabatabai, a critic of Iran's spiritual leader, Ayatollah Ruhollah Khomeini, was shot and killed last July 22 at his Bethesda home by a man dressed as a letter carrier. Prosecutors have alleged the assassin was Daoud Salahudin, also known as David Belfield, said to have fled the U.S., for Iran the night of the murder. Salahudin allegedly drove to the victim's home in a U.S. Postal Service jeep provided by letter carrier Tyrone Frazier. After Frazier turned over the jeep, prosecutors have said, Butler drove him to Baltimore and around Maryland for about four hours.

FBI agents arrested Butler on 16th Street in the District of Columbia the following day. Unable to meet the bond, set at $10,000, he has remained in custody.

Yesterday's dismissal marks the second time a case against Butler has collapsed. Earlier, federal charges against Butler alleging conspiracy to violate civil rights were dropped.

Efforts to convict Frazier, the letter carrier, also have met courtroom difficulty.Charges the he aided the assassins were thrown out in October by a Montgomery County circuit court judge who said FBI agents improperly had induced him to change his story by promising him special treatment.