In a major relief for Indian doctor Mohammad Haneef, who was wrongly accused of involvement in the failed UK car bombings, Australian police today dropped its probe into the case.

"At the present time, there is insufficient evidence to institute proceedings against Dr Haneef for any criminal offence," Australian Federal Police  (AFP) said in a statement.

"AFP has concluded its active inquiries, although some long-standing overseas inquiries are yet to be fully resolved," it added.

Haneef's solicitor Rod Hodgson has been told that AFP had recently informed Attorney-General Robert McClelland and Home Affairs Minister Bob Debus that Haneef "is no longer a person of interest".

Haneef's lawyer Hodgson said he conveyed this on phone to his client Haneef, who was extremely happy at the development.

He was unable to give any further details on whether Haneef wanted to seek compensation or whether he would be returning to Australia to work.

The Australian police had received severe flak for its handling of the case of Haneef, who was kept in detention for three weeks following his arrest at Brisbane airport on July 2 last year in connection with the failed London car bombings, only to be absolved later of terror charges.

A government ordered inquiry which is underway into the matter, decided last month not to make public the "sensitive" evidence as it could harm diplomatic ties with the UK.