Daniels, who is locked in a court battle with US President Donald Trump over their alleged affair, was accused of allowing a customer to touch her at lap-dancing bar in Columbus, Ohio.
Her lawyer Michael Avenatti said three misdemeanour charges brought against Daniels had now been dismissed.
She had been arrested while performing an act she has done at nearly 100 strip clubs across the US, Mr Avenatti said.
He added that some patrons touched the 39-year-old in a “non-sexual way”, but the police claimed she violated state law, which prohibits anyone who is not a family member to touch a nude or semi-nude dancer.
Mr Avenatti wrote: “This was a setup & politically motivated. It reeks of desperation.”
Daniels, whose real name is Stephanie Clifford, is suing Mr Trump and his former personal lawyer Michael Cohen to nullify a 2016 non-disclosure agreement preventing her from speaking out about the alleged affair she claims they had in 2006.
Just days before the 2016 election, Mr Cohen paid Daniels $130,000 (£98,400) in exchange for her silence.
She is hoping to have the non-disclosure agreement thrown out on the grounds that it is not valid because Mr Trump never signed it.
Through White House officials, Mr Trump has denied the affair, although Mr Cohen has admitted paying Daniels as part of the agreement.
He initially said he used his own money to pay Daniels and was not reimbursed by the president.
However, Mr Trump – who initially denied knowledge of the payment – subsequently conceded that his lawyer was in fact reimbursed.