Mr Mcalpine, 42, was arrested in April by Cumbrian police in his home town of Workington after he mentioned that homosexuality was among the sins listed in the Bible. His comments were not made in his main public sermon but in response to a question about homosexuality put to him by a passerby.
He was arrested by PC Craig Hynes for a "racially aggravated" offence under Section 5 of the Public Order Act and, after being detained at the station for more than seven hours, was charged with using "threatening, abusive or insulting" words "to cause harassment, alarm or distress". The charges were later dropped.
The arrest sparked fears for freedom of speech for Christians and was even criticised by prominent gay rights campaigner Peter Tatchell.
According to the Christian Institute, which funded Mcalpine's legal defence, Cumbrian police have accepted that they acted unlawfully.
Mr Mcalpine said he was pleased the case had been settled without going to court.
Responding to the settlement, he said: "I forgive the police for how they treated me and I hope that this doesn't happen to anyone else.
"Despite my experience I still respect the police. I will pray for them because they have a difficult and sometimes dangerous job."
Mike Judge, spokesman for the Christian Institute, said Christians were being treated unfairly.
"Mr Mcalpine was arrested and held in a cell for expressing his Christian views. This is Cumbria, not North Korea.
"Sadly, it's not an isolated case. We have defended a number of Christians wrongfully arrested under Section 5 of the Public Order Act.
"There is a problem with the law and it needs to be fixed."
The settlement comes just weeks after Birmingham County Court awarded street preacher Anthony Rollins £4,250 in damages after the judge upheld his claims of wrongful arrest.
Mr Rollins was arrested and charged with breaching Section 5 of the Public Order Act after he described homosexual conduct as morally wrong whilst preaching in Birmingham city centre in June 2008. The charges were later dropped.
The street preacher decided to file a lawsuit against West Midlands Police after his complaint to the Independent Police Complaints Commission was rejected.
His claims of wrongful arrest, unlawful imprisonment, assault and battery, and the infringement of his human rights were upheld by Birmingham County Court on December 8.
The Christian Institute is appealing to the Government to amend Section 5 of the Public Order Act, which makes it a criminal offense to use "threatening, abusive or insulting" words or behaviour in a way that could alarm or distress another person. It wants the Government to repeal the word "insulting".