Nottinghamshire Police have agreed to pay £20,000 to a Muslim student, who claimed he was wrongly arrested as a terror suspect.
Rizwaan Sabir downloaded "the Al Qaeda Training Manual" for a PhD study into counter-terrorism at the University of Nottingham in May 2008.
Mr Sabir was held in police custody for a week and then released without charge.
The force insists the arrest was necessary and proportionate.
Mr Sabir emailed the manual to a friend, who was helping draft his PhD proposal.
He said his arrest and detention were unlawful, and amounted to false imprisonment.
"We've got to put this document into context, one it was downloaded from an American government website and actually a fuller version can be obtained through the University of Nottingham's own library and in fact it can even be purchased from the likes of WH Smith, Blackwells and Waterstones book shops," Mr Sabir said.
"This is hardly the stuff of terrorists. It was quite frankly disproportionate and over zealous action.
"I can now proudly say that some form of vindication has been achieved and my name has been cleared."
Nottinghamshire Police agreed to settle the civil case out of court but did not accept the arrest was unlawful.
A force spokesperson said: "The matter was settled without admission of liability save that the force admitted that one brief search of Mr Sabir and his vehicle carried out in February 2010 was the result of a mistaken belief on the part of the officers involved.
"This was admitted in November 2010 and the force apologises for this search.
"Given that all litigation carries with it a risk this modest monetary settlement was viewed as a sensible way of keeping overall costs to a minimum."
The force also agreed to amend intelligence records held on Mr Sabir.
A University of Nottingham spokesperson said: "This is a matter between the police and Rizwaan Sabir, who has not been a student at the university since he completed his studies here in September 2009."