Australian authorities dropped terror charges against a young Indian doctor today after being forced into a humiliating admission that they had no reasonable prospect of securing a conviction against him.

In a major political embarrassment, prosecutors withdrew a charge against Dr Mohamed Haneef, 27, of supporting a terrorist organisation because of alleged links with failed bomb attacks in Central London and on Glasgow airport.

The decision was taken by Australia's Director of Public Prosecutions, Damian Bugg, QC, who told reporters: "In the circumstances of this case I do not believe that evidence to prove the case to the requisite standard will be obtained. On my view of the matter a mistake has been made."

Dr Haneef, who has been working at a Gold Coast hospital, was arrested at Brisbane airport on July 2 as he arrived to take a flight to India on a one-way ticket.

He told investigators that he had wanted to see his new-born daughter, but was detained under controversial new anti-terror laws which do not require police to count "down time" – the period in which Dr Haneef was not being questioned – as they built a case against him.

But investigators appear to have made a series of bungles in their handling of the case and were accused last week by Peter Beattie, the Queensland State Premier, of being "Keystone Cops" for having leaked false information apparently designed to make the case against Dr Haneef look stronger than it was.

Kevin Andrews, the Immigration Minister who had thwarted a court decision to release Dr Haneef into the community by cancelling his visa, said today that he had decided to free the doctor into residential detention while advice was sought on the implications of the dropping of charges.

But it was unclear where he was taken after his release from a Queensland detention facility this afternoon as he is officially homeless because he stopped paying rent on his apartment.

In the southern Indian city of Bangalore, Dr Haneef's wife, Firdous Arshiya, welcomed his release and thanked Indian authorities for their support. "I am extremely happy that finally the day has come when the truth has come out," she told reporters outside her parents' house.

The news that the charge had been dropped was also welcomed by India’s Minister of State for External Affairs, E. Ahamed, who said that the Government would ask Australia to give Dr Haneef a visa so that he could return normally rather than face deportation.

Dr Haneef was alleged to have provided support to a terrorist organisation plotting attacks in Britain by giving his mobile phone SIM card to a relative later linked to the failed plan to bomb Central London and Glasgow airport.

But Alan MacSporran, a lawyer acting on behalf of the DPP said that Mr Bugg's review had revealed two errors in the police investigation.

The first related to the location of the SIM card, which police claimed was found in a burning Jeep used in the Glasgow terror attack. Later it emerged that the card was in possession of Dr Haneef's cousin in Liverpool, 200 miles away.

The second error related to claims that Dr Haneef had lived with his cousins Sabeel and Kafeel Ahmed in the UK before arriving in Australia. Kafeel Ahmed was allegedly driving the Jeep in the Glasgow terror attack while Sabeel Ahmed has been charged with withholding information relating to a terrorist act.

The two errors are now being investigated. Mick Keelty, the Australian Federal Police (AFP) Commissioner, was unrepentant and said that the AFP would continue to investigate any potential Australian links to the failed UK terror attacks.

"It will continue until we satisfy ourselves that the matter is finalised as far as the Australian connection is concerned and as far as the outstanding UK inquiries are conducted," he said.

Mr Keelty did not rule out further charges against Dr Haneef.

Asked by a journalist whether the case had been a fiasco, Mr Keelty said: "They are your words, not mine. The police investigation has been thorough, I make no apology for that, nor should I in a terrorism investigation in this country. We have done our job well in this instance, we have done our job professionally."

John Howard, the Australian Prime Minister, moved quickly to distance his Government from the debacle, saying that Mr Keelty and Mr Bugg were responsible for the handling of the case

"I think that the right thing now is for those two men to explain the process and explain the reasons," he told reporters on a visit to the Indonesian island of Bali. "Prime ministers don’t conduct prosecutions, nor do attorneys-general -- directors of public prosecutions do."

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