Lord Holmes of Richmond was found not guilty of sexual assault, following a trial at Southwark Crown Court.
Jurors had heard he allegedly grabbed the beauty therapist's bottom last March and asked if she did "extras" as she finished a 90-minute massage.
The 48-year-old is one of Britain's most successful Paralympians, having competed at four Paralympic Games.
Lord Holmes, of Priory Road, Richmond, Surrey, was accompanied by his guide dog in the dock and rubbed his eyes and repeatedly breathed sighs of relief after the verdict was given by the jury, which deliberated for more than five hours.
He was helped from the dock by his wife.
After retiring from sport in 2002, Lord Holmes went into a career in law before being appointed to the House of Lords in 2013.
He told police he touched the woman on her face and shoulders before resting his hands on her around the level of her hips.
But, the complainant told the court Lord Holmes had then pointed at his crotch and asked if she did "extras".
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