A judicial inquiry into his arrest, ordered by the new Labor government, found Haneef had no prior knowledge or involvement in the Glasgow attacks and should never have been charged, saying some decisions in the case were "mystifying".
The report said the Australian Secret Intelligence Organisation (Asio) consistently advised the previous conservative government that there was no credible evidence against Haneef.
The Australian Federal Police (AFP) also told the government the same thing, but later changed its position and backed a prosecutor's call to charge Haneef.
John Howard 'cleared'
The inquiry cleared John Howard, the former prime minister, of any wrongdoing, saying Haneef's arrest was not politically motivated in order to capitalise on concerns about security.
But it said the government failed to analyse the conflicting opinions held by the intelligence services and the police.
"From a whole-of-government perspective ... no serious attempt was ever made to interrogate Asio's assessment of Haneef or to reconcile it with the approach pursued by the AFP," the report said.
Haneef, now living in the United Arab Emirates, has previously said his family is still coming to terms with what happened in Australia, but he could still return to the