Nasar Khan, 34, a former Lance Bombardier with the Royal Artillery, who helped to interrogate Iraqi prisoners during the Gulf War, has refused the offer, which he described as paltry. His case will now be heard by an employment tribunal next month.
The former soldier claims racial and religious discrimination spanning a 10-year career in the Royal Artillery, beginning in 1989. During that period, he claims, he was forced to endure taunts such as "Muslim shite", "raghead" and "black bastard", and ordered to do menial work in front of his subordinates.
In June last year a civil tribunal decided that Mr Khan's claim could be heard by an employment tribunal under the Armed Forces Act. The Act, which came into effect in October 1997, gives military personnel the same employment rights as civilian workers.
Mr Khan, who is married with three children, has accused the Army of hypocrisy in trying to prevent his action from coming before a civilian court.
The Army's internal Equal Opportunities Investigative Team completed its own inquiry into Mr Khan's complaint in July. The former soldier claimed it had found enough witnesses to support his claims that he was subjected to frequent racial abuse. His lawyers believe that the ongoing and protracted nature of the discrimination justifies compensation in the region of pounds 150,000.
In the Gulf War, Mr Khan's knowledge of Arabic, picked up during an earlier two-year stint with the French Foreign Legion, was used to interrogate Iraqi prisoners of war.
Mr Khan alleges that during this time he was taunted: "You're on the wrong side, you raghead, you should be in Pakistan." And when he applied to join the SAS, he said his application form was returned with the remark: "They don't take Pakis in the special forces."
Mr Khan said yesterday: "They don't want the truth to come out because they've got too much to lose. With what's happened in the last year concerning racism in the police and the fire service, they have got to be seen to be cleaning up their act as well."
A spokesman for the Ministry of Defence said that the case was a personal matter between them and the former soldier and would not comment.
The Khan case could seriously damage the Army's efforts to repackage itself as an ethnic-minority friendly employer. It recently launched an advertising campaign aimed at attracting recruits from different backgrounds.
Even Army rations now include provisions for soldiers who cannot eat certain foods for religious reasons. And the Army now recognises non-Christian religious holidays.
Despite these initiatives, black and Asian servicemen and women still make up only 1.1 per cent of the British armed forces.Reuse content