Benjamin Reeves, 59, had pleaded not guilty to stalking Ms Holtznagel between April and July last year at venues in Sydney's CBD and Bondi Beach.
Police on Thursday dropped the charges against him as he was due to face a hearing at Downing Centre Local Court.
Ms Holtznagel rose to fame on Australia's Next Top Model. She has modelled for Bras N Things, Playboy and Guess, and has appeared on a number of reality TV programs including SAS Australia and I'm a Celebrity…Get Me Out Of Here!
Magistrate Glenn Bartley said the proceedings against Mr Reeves were initiated without reasonable cause and were not investigated properly by police.
He ordered the prosecution to pay his legal costs of $36,000.
In a statement to police, the model accused Mr Reeves of walking slowly past her at Bondi's Hotel Ravesis and holding eye contact with her for 40 seconds.
But CCTV footage of the incident played in court showed him walking directly into the hotel and up a flight of stairs, past the ground floor area where Ms Holtznagel said she was seated.
"I don't think I need to play it again to show that (the statement) doesn't even approach what actually happened," his lawyer Steven Boland said.
"I don't want to beat the drum too loudly but I don't think you can imagine a less criminal act than entering a pub and walking up a staircase if you tried."
Mr Boland argued police should never have launched the proceedings.
"It was embarrassingly lacking in objective support," he said.
"This prosecution was utterly incapable of succeeding."
Police prosecutor Liam Edwards admitted there were inaccuracies between the statement and what the footage showed.
"Isn't inaccuracies minimising it? What one sees is totally different to what was asserted," Mr Bartley said.
"It seems there was no adequate scrutiny of the CCTV footage.
"The complainant as a source is demonstrably unreliable."
An AVO by Ms Holtznagel against Mr Reeves was also dropped.
Mr Reeves is attempting to sue the Daily Mail for defamation over an article he claims falsely reported he was guilty of stalking Ms Holtznagel and a separate, unnamed woman.
He was CEO of the Australian Association of Graduate Employers until he was terminated when the article was published.
He said the report destroyed his reputation, leading to him losing his job at the AAGE.
The article was shared around the 375 members of the AAGE, which included large corporations and state and federal governments, preventing him from finding a job at these entities, he said.
"(Mr Reeves) has been gravely injured in his character, his personal reputation, and his professional reputation, and has suffered and will continue to suffer substantial hurt, distress and embarrassment," he wrote in a statement of claim filed with the Federal Court.
He is seeking aggravated damages from Dailymail.Com Australia, any financial losses caused by his termination as CEO and his legal costs.
Mr Reeves on Tuesday was unsuccessful in an unlawful arrest suit he brought against NSW police after he had separate stalking charges against him thrown out.