The Christian Legal Centre says that Rob Hughes, 38, was arrested in Basildon in September last year whilst preaching after an exchange with a member of the public who said he used homophobic and offensive language.
The woman had confronted Mr Hughes shouting that she was "gay and proud".
It was reported that she told him to get off "your pedestal" and "homophobia is not in this town".
Mr Hughes said he had been preaching for around 15 years and said he had not spoken about homosexuality.
He recorded everything he had said when preaching, however he was arrested and held in custody for 11 hours and released after being told no further action would be taken due to insufficient evidence.
The Christian Legal Centre, supported his case. He said: "I never intended to cause distress to anyone.
"However, some people take offence very easily even when certain topics haven't been preached on.
"I preach the gospel, which means good news and the love of God for all, which he has shown us through the death of his Son."
Mr Hughes received £2,500 and a contribution towards his legal fees for wrongful arrest, false imprisonment and breach of his human rights as part of an out-of-court settlement.
Additionally, street preacher Andrew Geuter, has also had all charges against him have been dropped.
Mr Geuter was arrested in April 2015 following a complaint made by a shop owner who said that Mr Geuter's comments were offensive and homophobic.
It is reported that he had been preaching on the Christian definition of marriage arguing that the present Government has destroyed marriage in its determination to redefine marriage to include relationships between people of the same sex.
He was asked by the police to move on and stop preaching but he refused and was consequently arrested.
The charges were dropped by the CPS in May due to insufficient evidence.
Andrea Minichiello Williams, barrister and founder of the Christian Legal Centre said: "These cases are further examples of situations where the freedom of Christian preachers is restricted, when what they are saying is entirely lawful.
"In Mr Hughes' case, he was not even talking about sexuality and yet was targeted by a member of the public who tried to shut him down.
"The police officer involved with Mr Geuter's case wanted him not to preach the words of Jesus after one complaint was made about him expressing his opinion about the destruction of marriage by the government.
"We are delighted that these two men, who fearlessly speak the good news of Jesus on our streets, can walk free.
"We are grateful that there has been some recognition that the police got it wrong in Mr Hughes' case, but more still needs to be done to ensure that freedom of speech is upheld."
