Australia on Thursday to Indian doctor Mohammad Haneef for wrongly detaining him on terror charges three years back, saying it was a mistake and hoped that the compensation paid to him will mark the end of an "unfortunate chapter".

"The AFP (Australian Federal Police) acknowledges that it was mistaken and that Dr Haneef was innocent of the offence of which he was suspected," the Australian government said in a public apology.

"The commonwealth apologises and hopes that the compensation to be paid to Dr Haneef will mark the end of an unfortunate chapter and allow Dr Haneef to move forward with his life and career," it said, according to AAP report.

Mr Haneef, 31, is a cousin of Sabeel Ahmed — the main accused in the failed attack on the Glasgow International Airport in the UK in 2007.

The Indian doctor, who was working at the Gold Coast Hospital since September 2006, was arrested on July 2, 2007 from the Brisbane airport.

He was charged with recklessly giving support to a terrorist organisation when his mobile phone Sim card, which he had left with his cousin before coming to Australia from the UK, was linked to the attack.

His 12-day detention was the longest without charge in recent Australian history, triggering outrage in India as well as in Australia.

The formal apology came after Mr Haneef agreed on a substantial but undisclosed compensation payout from the government after two days of negotiations.

Before the mediation talks, Mr Haneef's lawyers had said the compensation could be upto one million dollars.

It was also acknowledged that arresting, charging, detaining and eventually cancelling Haneef's visa created "serious consequences for him and his family" by the government.

The apology, which was released by the attorney general's department on Wednesday, said that the terms of the settlement shall remain secret.

Mr Haneef's lawyer Rod Hodgson has said the apology reaffirmed his client's innocence.

"We congratulate the government for recognising an injustice done on the watch of the previous government and for this public apology and declaration of innocence," he said.

"The apology means a lot to our client."

He said the financial settlement was "substantial" and Mr Haneef was "delighted" with the deal.

In return, Mr Haneef has dropped a civil claim against the government and defamation action against the former immigration minister Kevin Andrews, who had revoked the doctor's visa after he got bail.

Following the settlement of the claim, Mr Haneef who isaccompanied in Brisbane by his wife Firdous and three-year-old daughter Haniyah, had said, "I'm very pleased and happy with the resolution of this matter".

The doctor, who is now practising in the UAE, said he would consider returning to his original job on the Gold Coast.

"My wrongful arrest and detention in 2007 was a very traumatic experience and the settlement is a chance to end that part of my life and move on with my family," he said.

He said he and his family still look forward to possibly returning to Australia one day, as he thanked his friends and supporters in this country and back in India who he said had been a "great source of strength".

Former immigration minister Andrews, however, remained defiant and said the claim for defamation against him was always "adventurous." He insisted that he has made no apology and paid no compensation to Mr Haneef.

"The claim against me was not pursued and has been withdrawn. Based on the legal advice I received, I was always confident that the claim for defamation was adventurous and would not have succeeded," Mr Andrews said earlier this week.

Hodgson said the Australian people would form their own judgements about Andrews' refusal to offer his own apology.

"On one side we have ASIO (Australian Security Intelligence Organisation), the Queensland Police Service, the findings of the Clarke Inquiry, the AFP and the current Australian government all prepared to declare that Mr Haneef is innocent," he said.

"Andrews continues to isolate himself by his aggressive refusals to make any form of apology for his role."

Hodgson said the Mr Haneef family has remained in Brisbane after the conclusion of compensation talks this week.

"They have been buoyed by the number of ordinary Australians who have come up to them to wish them well," Mr Hodgson said, adding "Haneef again thanks all Australians for their support."