John Matthews, 22, had been given references 'of the utmost distinction', according to the magistrate who discharged him, and was described as 'an entirely innocent and honest citizen' by Peter Bottomley, the MP who campaigned for him.
He was taken back into custody and driven to Paddington Green top-security police station minutes after his relatives had begun celebrating his release at Thames Magistrates' Court in east London. He had been held at Belmarsh Prison, south London, for 10 weeks.
Mr Matthews, whose address is Londonderry but he was born in Liverpool, was accused of hijacking a taxi in north London on 24 April - the day of the Bishopsgate bombing - and ordering the driver to take a bomb to Downing Street. The car was eventually abandoned in Judd Street, Holborn, where it exploded without causing injury.
Mr Matthews was arrested at Heathrow Airport on 27 April and charged on 4 May with causing an explosion with high performance explosives of a nature likely to endanger life. He has always maintained his innocence, according to his father Joe, who said yesterday that his son had no involvement in terrorist activity.
'He was originally arrested for the Bishopsgate bomb but he was able to prove he was in the porter's lodge at Chase Farm Hospital (Enfield, north London), where he works,' he said.
'He has been in custody for 10 weeks because the police said there was forensic evidence that he had handled high explosives. But now I understand the forensic report is complete and says that it cannot be proved that he had been near any explosives.
'They tried to get him for the taxi bomb, but he was in bed at his aunt's in Wood Green at the time and she gave evidence to that effect. I believe he was arrested just because the police were looking for young Irish lads going home after the big bombing.'
In court yesterday, Mike Bibby, for the Crown Prosecution Service, said that he had reviewed the available evidence and had concluded that it 'would not offer a realistic prospect of conviction'.
He offered no evidence against Mr Matthews, despite telling the court at an earlier hearing that there was evidence of identity and forensic science evidence.
David Fingleton, the stipendiary magistrate, said that Mr Matthews had received references of the utmost distinction and he would leave court a free man.
Mr Bottomley said that he would continue campaigning for his freedom. 'His arrest and detention was due to a series of injustices and he should have been able to walk out of the court without a slur on his character,' he said.