Diane Holliday, 37, of Little Saxham, Suffolk, had been questioned by Metropolitan Police detectives investigating an alleged financial deception.

But a Metropolitan Police spokesman said that on the advice of Crown Prosecution Service lawyers the case against Ms Holliday had been dropped.

Ms Holliday, who is divorced with two teenage children, was arrested by Scotland Yard detectives in February - shortly she told newspapers of her involvement with Dodi Fayed.

Dodi Fayed: His father denied the claim

She said Mr Fayed, who died in the Paris car crash which claimed the life of Diana, Princess of Wales, in August last year, was the father of her daughter Marni, who will be two in November.

Ms Holliday said she had a five-month secret affair with Mr Fayed while he was also romantically involved with the princess.

She said her daughter had been given up for adoption in the United States shortly after being born in November 1996.

DNA 'evidence'

Her claims were dismissed by Mr Fayed's father, Mohammed Al Fayed, the owner of Harrods.

Ms Holliday claimed she had DNA evidence which would prove her claim.

Scotland Yard has never given any details about the deception allegations made against Ms Holliday.

Ms Holliday has appeared before magistrates in Ipswich, Suffolk, in recent weeks in relation to a separate allegation.