Mr Mcalpine said the PCSO was offended by his beliefs
Charges have been dropped against a Christian preacher who told a police officer homosexuality was "a sin".
Dale Mcalpine, 42, was accused of a public order offence after speaking to a community support officer (PCSO) in Workington, Cumbria, in April.
Mr Mcalpine, who denies being homophobic, claimed police told him his views were against the law.
Cumbria Police said staff often have to make "difficult decisions" but the force respects freedom of expression.
Mr Mcalpine was preaching to shoppers in the west Cumbrian town on 20 April when he said he was approached by the PCSO, who told him he was a liaison officer for the local lesbian, gay, bisexual and transgender (LGBT) community.
"He told me he was homosexual," Mr Mcalpine said.
"I said 'the Bible says homosexuality is a sin'. He said 'I'm offended by that and I'm also the LGBT liaison officer within the police'.
"I said 'it is still a sin'."
He said three uniformed police officers then appeared and accused him of using homophobic language.
"I'm not homophobic, I don't hate gays," Mr Mcalpine said. "Then they said it is against the law to say homosexuality is a sin. I was arrested. It's crazy isn't it?"
Gay rights campaigner Peter Tatchell said Mr Mcalpine's arrest was wrong
Mr Mcalpine was charged with breaching section 5 of the Public Order Act by allegedly using threatening, abusive or insulting words or behaviour likely to cause harassment, alarm or distress.
He was due to stand trial later this year, but the CPS have now confirmed they will not be prosecuting.
A spokeswoman said: "We keep cases under constant review and following a further review of all the evidence in this case we were no longer satisfied that there was sufficient evidence to provide a realistic prospect of conviction and we have therefore discontinued the proceedings against Mr Mcalpine."
Veteran gay rights campaigner Peter Tatchell condemned the arrest and urged the home secretary to issue new guidelines to the police.
He said: "Although I disagree with Dale Mcalpine and support protests against his homophobic views, he should not have been arrested and charged. Criminalisation is a step too far."
Chf Supt Steve Johnson, police commander for West Cumbria, said: "We would like to reassure the public that we respect, and are committed to upholding, the fundamental right to freedom of expression.
"We are just as committed to maintaining the peace and preventing people feeling alarmed or distressed by the actions of others in public places.
"Our officers and staff often have to make difficult decisions whilst balancing the law and people's human rights, this is not easy especially when on occasions opinions and interpretations differ."