A woman given an Anti-social Behaviour order (Asbo) based on false allegations made against her is to be compensated by the council that issued it.
False claims were made that Mrs X played her music too loudly
Manchester City Council will pay the woman £2,000 for what the Local Government Ombudsman called an "abuse of power of nightmarish proportions".
The ombudsman's report said proper inquiries into the claims would have cast doubt on their veracity.
The council "fully accepted" the report and has reviewed its practices.
Council officers were called in, in June 2004, when a woman known as Miss A complained she was being subjected to anti-social behaviour by her neighbour, Mrs X.
Miss A claimed that as a result of the behaviour, which she alleged included threats of violence, intimidation, verbal abuse and playing music too loudly, she had become ill.
However, the report revealed there were no attempts to corroborate the claims with either neighbours or the police.
And Mrs X was only made aware of the allegations when she was served court papers for a hearing in December 2004, which led to an interim Asbo being granted.
She contested the decision and more than 20 letters were written in her defence, leading to the Asbo being withdrawn, in court, three months later.
Ombudsman Jerry White said: "It is extraordinary that the allegations were never put to Mrs X before the council sought an Asbo against her, at first behind her back and then by serving papers on her just days before a court hearing.
"It is extraordinary too that it never sought corroboratory evidence from third parties.
"This was an abuse of nightmarish proportions."
The council was found guilty of maladministration and told it should review the way in which cases like these are handled.
Deborah McLaughlin, council director of housing, said the authority "fully accepted the findings" and apologised to Mrs X .
"We have learnt lessons from the way we dealt with Mrs X in 2004. In 2005 we fully reviewed our procedures," she said.
"[But] we should also point out that our initial application for an anti-social order was confirmed by the court in the face of convincing evidence and was not something carried out in isolation by our officers."