A jury acquitted Terry Battenbough, 36, of the charge after he was arrested in Earls Court, west London, in February 1989. Mr Battenbough said that the knife came from the police officer's own pocket.
The officer then threatened to arrest Mr Battenbough unless he admitted that he was homosexual.
Mr Battenbough sued the Metropolitan Police for false imprisonment and malicious prosecution. In an agreed statement read out at Croydon County Court yesterday, it was stated that the police officer repeatedly questioned Mr Battenbough about his sexuality before arresting him.
It said: 'The police officer gave evidence at trial to the effect that when he stopped the plaintiff he searched him in the street and found the flick knife concealed and not easily visible in his jacket's right-hand breast pocket. At the trial, Mr Battenbough produced what he said was the jacket.'
The statement went on: 'When the police officer demonstrated the position of the knife in the pocket in the course of his evidence it was plainly difficult to conceal because of the size of the breast pocket.'
Mr Battenbough said yesterday: 'This completely false accusation caused me enormous grief and distress. A police officer tried to tell lies in court to get me convicted of an offence I did not commit because of his prejudice against me on the grounds of my sexuality.
'I hope my victory will encourage other gay men who suffer harassment from the police to take legal action, as I have done.'
A Scotland Yard spokeswoman said a payment had been made to Mr Battenbough and his legal costs, estimated at more than pounds 7,000, paid, although Scotland Yard did not admit liability.Reuse content