As part of the settlement, and in an effort to support the Muslim community in the area, the proposed Afghan mosque in Doveton has received a significant funding boost. The mosque project was given a cheque for $20,000 by The Age on Monday.

Last September, The Age published a photograph of Mr Abu Bakar Alam on its front page. The editor-in-chief, Andrew Holden, said The Age had immediately accepted that it had made a terrible mistake, removed the photograph from its website and had no hesitation in apologising to Mr Alam.

"I have met with Mr Alam and he is an impressive young man. There is no question that he and his family had no association with Haider, or any terrorist activities. On behalf of The Age, I apologise again for the error that we made.

"It is a mark of the Alam family that, in reaching a settlement with The Age, they wanted their local community to benefit, and The Age is pleased to be able to support them in this way."

The Afghan mosque project will develop a new centre on industrial land in Green Street. It will be able to hold up to 600 people during festivals. The current mosque in Photinia Street is shared by a number of different communities and its facilities are unable to cope with demand.

Mr Alam said: "Being wrongly identified as a terrorist was devastating and extremely hurtful to me and my family.

"I am happy and relieved that Fairfax has acknowledged it made a grave error and hope that such a mistake will never happen again.

"While I have suffered personally, I am pleased that some goodwill came out of what has happened to me through funds being provided for a new mosque."

A number of other Fairfax papers and websites also carried the wrong image, and have apologised to Mr Alam.