The 36-year-old's missing medals and white hat have been found at a bar in Geelong, west of Melbourne, where the sailor had partied the night away for the Anzac Day long weekend.
Police had spent two days investigating the incident after the sailor reported them stolen.
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"It's disappointing," said Detective Senior Constable Simon Keogh. "It's taken a bit of police time and all for no reason."
The sailor woke up in the gutter with a bruised head late on Sunday evening about a block from the war ship HMAS Ballarat, which had been docked at Geelong's main pier.
Anzac Day party
He had no memory of being attacked but noticed that his Iraq Campaign Medal, Australian Service Medal and Australian Active Service Medal - and his hat - were missing.
Police had examined whether the medals and hat had been taken while he was unconscious or if someone had knocked him to the ground and taken them afterwards.
But it turns out the man had simply passed out on his way back to the ship after a night of heavy drinking.
The medals had fallen off while he was still on the dance floor of Lamby's, a nightclub about 200 metres from the pier, and his hat had ended up with a bunch of girls.
A bouncer collected the medals and hat for safe keeping. They were subsequently handed over to police and then the navy.
The unnamed sailor - an Iraq War veteran - left port on the warship on Tuesday.
