* Smaller of two corruption cases thrown out
* Erdogan reasserting authority in wake of scandal
* Former Istanbul prosecutor under investigation
The case, concerning the alleged award of illegal permits in building projects, was the smaller of two dossiers in the graft affair, which broke into the open on Dec. 17 when businessmen close to Erdogan and three ministers' sons were detained.
The scandal posed one of the biggest challenges of Erdogan's 11-year rule, leading three members of his cabinet to quit and drawing international criticism for his response - tightening control of the Internet, banning Twitter for two weeks and reassigning police, judges and prosecutors.
Erdogan has cast the corruption investigations as part of an attempted "judicial coup" by U.S.-based Islamic cleric Fethullah Gulen, a former ally who wields influence in the police and judiciary. Gulen denies involvement.
The closure of one of the two main cases in the scandal is a further sign of Erdogan reasserting his authority ahead of a presidential election in August, in which he is expected to run, following the turbulence of recent months.
His AK Party dominated in March 30 municipal elections, with his core support base dismissing what they saw as a baseless plot to undermine a leader they champion for delivering a decade of rising living standards.
On Tuesday, he said he would ask the United States to extradite Gulen, a move which could bring the struggle with his most powerful political enemy to a head.
Erdogan's government had dismissed or reassigning thousands of police officers and hundreds of judges and prosecutors - including those leading the investigation - and passed a law increasing government control of the judiciary.
The High Council of Judges and Prosecutors (HSYK), which now answers directly to the justice minister, launched an investigation on Friday into Zekeriya Oz, the former deputy chief Istanbul prosecutor who had led the initial Dec. 17 probe until he was replaced weeks later, local media said.
The case was dropped against Abdullah Oguz Bayraktar, son of former Environment and Town Planning Minister Erdogan Bayraktar, and businessman Ali Agaoglu, along with 58 other suspects, Dogan news agency and other media outlets reported.
Court officials could not immediately confirm the decision.
The primary investigation is continuing into allegations of bribes paid to Turkish officials by what police describe as a criminal gang helping Iran to exploit a loophole in the West's sanctions regime against the Islamic republic.
Using the loophole, Iran was able for a time to purchase gold with oil and gas revenues.
The Iran gold case has been the main focus of interest in the graft scandal, given its international dimension and the alleged involvement of three former ministers and the head of a public bank. Those accused have denied wrongdoing.
Those questioned in the initial sweep in the building case included the mayor of Istanbul's Fatih municipality, which includes the city's historic peninsula, and Murat Kurum, the general manager of real estate firm Emlak Konut GYO, partly owned by state housing developer TOKI.
All were later released. Agaoglu's company said at the time no criminal evidence had been found. Emlak Konut said days later Kurum had returned to work.