Mr Davies, 55, lost his claim for unfair dismissal against the newspaper after a three-day hearing in London.
He had claimed his bosses panicked when they thought skeletons were going to come out of the cupboard and said the Mirror publisher, Robert Maxwell, had promised to reinstate him two days before drowning in November last year.
Mr Davies said Maxwell had told him to appeal to him personally after the dismissal and that he still had his job and not to worry. But the chairman of the tribunal said the sacking was justified and an appeal to Maxwell would not have altered the position.
Mr Stott and the former political editor of the Mirror, Joe Haines, had told the hearing that Mr Davies had been accused of being an arms dealer by the author Seymour Hersh. He was said to have visited an American arms dealer, Ben Kaufman, in Ohio in 1985.
Mr Davies had denied being in the United States that year and the newspaper had defended him in print. But a rival newspaper produced a photograph of Mr Davies with Mr Kaufman's wife. Executives came to the conclusion that Mr Davies was lying.