John Maughan, from Bishop Auckland, was charged in 2008, when police said they found hundreds of indecent pictures on his computer.
But after arguing he was out of the country at the time and that his computer had been hit by viruses, the charges were eventually dropped.
Following a civil claim against the force, Mr Maughan settled out of court.
But despite the settlement - made up of £15,000 in compensation and £20,000 in costs - Mr Maughan says he is now unemployed with his life "destroyed".
The engineer was contacted by Durham Police while working in the United Arab Emirates in January 2008. When he returned he was charged with downloading almost 600 indecent images, the Northern Echo reported.
Mr Maughan claimed a virus on the computer was responsible for downloading the images, but police told him they could find no evidence of viruses on the machine.
But when Mr Maughan had the computer independently checked, more than 250 viruses were discovered.
After several court appearances at which Mr Maughan denied all charges, the case was dropped in May 2009.
A protracted civil claim against the force followed and he accepted an out-of-court settlement in October.
But Mr Maughan, who cares for his wife who has Alzheimer's, says the ordeal has cost him his job and his friends and he is now living on state benefits.
He said: "Initially I didn't really know what it was all about. Even when I was arrested I didn't understand what was going on.
"When you're faced with being charged with something like this it is absolutely horrendous.
"People don't look you in the eye and avoid you in the street.
"I've had eight long years to get to where I am now. Once the charges were dropped I had to go and clear my good name.
"I just hope some members of Durham Police can sleep at night, because my life has been utterly destroyed."
A spokesman for Durham Police said: "Following the pursuit of a civil claim against Durham Police after the arrest of a man in 2008, the force and the individual in the case have come to an agreement to settle the matter out of court."
A man wrongly accused of downloading child abuse images eight years ago has been paid £35,000 by Durham Police.