Nargis Firdous was a ward manager for the Bethlem and Maudsley NHS Trust in south-east London with more than 14 years' experience as a nurse.
She claimed a line manager appointed in 1993 carried out a sustained campaign to remove her from her post.
The CRE says the settlement, reached after an 11-day hearing at an industrial tribunal in Croydon, south London, is one of the largest ever in a racial discrimination case.
Mrs Firdous was dismissed by the trust in November 1994 after more than a year of complaints about petty incidents from the manager, and despite being backed by her hospital's director of operations. At a press conference yesterday, Mrs Firdous said: "I am relieved it is over... It has compensated me to some extent but my costs are much higher than pounds 50,000."
CRE chairman Herman Ouseley said the case highlighted problems faced by NHS employees from the ethnic minorities. "What happened to Mrs Firdous, a valued and highly skilled nurse doing a vital job ... should never be allowed to happen to anyone," he said.Reuse content