"This 'case closed' response does not add up - given the findings of the 2007 coronial hearing which concluded that a war crimes trial under the terms of the Geneva Convention should be seriously considered," she said.
New Zealander Gary Cunningham, Australians Greg Shackleton and Tony Stewart, and Britons Brian Peters and Malcolm Rennie were covering the Indonesian invasion when they were killed in the East Timorese border town of Balibo.
"We are surprised and disappointed that there will be no move to prosecute those alleged to be responsible for [their] deaths," Ms Leadbeater said in her letter to Mr McCully.
She added: "The historical record shows that New Zealand has relied on Australia to take the initiative in the numerous inquiries that have taken place over the years into the deaths of journalists. It is time we became more proactive in the search for the truth.
"New Zealander Gary Cunningham is a hero for peace as he and his colleagues were trying to expose Indonesia's illegal incursion into the then Portuguese territory. Had the events not been covered up at the time a terrible 24 year long war might have been prevented.
"For the sake of the Balibo Five and the hundreds of thousands of victims of Indonesia's past brutal occupation of Timor Leste this matter cannot be allowed to drop."
Family members of the five men had been informed of the decision, AFP said.
John Milkins, son of Kiwi cameraman Mr Cunningham, said the police decision was unjustified, and there had been a clear breach of international laws on the protection of unarmed citizens.
"That's very clearly what happened from the coroner's finding in 2007. She interviewed a lot of eyewitnesses and said that the Balibo Five were shot, or stabbed, deliberately by Indonesian soldiers. Many eyewitnesses from both the Timorese and the Indonesian side confirmed that," he told Radio New Zealand.
New Zealand could now pick up the case, Mr Milkins said.
