Jo Calvert-Mindell, 51, a former policewoman, was arrested in her nightgown four months after the incident and charged with using racially aggravated threatening words or behaviour.
Now, after another four months of “hell”, the charges have been dropped and Ms Calvert-Mindell, a Lib Dem councillor, said: “The last thing I am is a racist.
“I think there is something very wrong when a resident can’t go out and try to prevent crime and disorder and encourage the defendants to go back home, and that they can then play the race card to completely absolve themselves of any responsibility for that behaviour.
”Cllr Calvert-Mindell, who is also a former social worker, had called officers to report a group of eight drunken University of Kent students who were repeatedly waking her and neighbours in Canterbury last November.
When she stepped out of her home to confront them, she said: “Why can’t you go back to where you come from and make some noise there? I bet your families and neighbours wouldn’t put up with it.” But two Asian students in the group complained and officers went to arrest her.
She said: “One of the officers told me I had 10 minutes to get dressed or they were taking me to the station in my nightgown. My 10-year-old grandson was crying because of the way they spoke to me.”
A DNA sample, fingerprints and a statement under caution were taken at Canterbury police station. She then appeared before Folkestone magistrates in May, where she denied the charge.
A Crown Prosecution Service spokesman said: “There is no longer sufficient evidence to provide a realistic prospect of conviction.”