Zara Phillips' husband has also had the £25,000 fine he was given in a disciplinary action cut.
The sum, which was imposed on him after his night out in Queenstown during the Rugby World Cup, was reduced to £15,000.
The Rugby Football Union acting chief executive Martyn Thomas said that while Mike's behaviour had been "unacceptable", "mitigating factors" had not been taken into account.
"Mike did not intentionally mislead the RFU team management when he stated that he could not remember where he was on the night of September 11, and that he was relying on other people's versions of events which were relayed to him," said the official.
"There was no evidence of any suggestion of sexual impropriety of any nature with the woman in question, and we accept the fact that she is a family friend who he has known for a long time.
"Mike expressed deep regret during the appeal meeting about his behaviour, and that he had apologised to [former England manager] Martin Johnson and the team for the events which unfolded as a consequence."
The Rugby Players' Association expressed their approval with the decision in a statement.
"Whilst we still believe the fine is excessive and disproportionate to the factual events of that night in Queenstown, we are relieved that Mike has been reinstated," it read.
"We have always maintained that the original judgement was misguided and mishandled and it is our assertion that Mike has been unfairly treated as a scapegoat on this matter."
Mike is no doubt relieved he will get the chance to add to his 75 caps. Mr Thomas did warn, hoever, that the September 11 incident might affect the 33-year-old's chances of making the squad next year.
"We are aware that the EPS Squad will be reviewed on January 1, 2012 and wish to make it clear that this decision does not prevent those deciding the composition of the EPS Squad from taking into account this incident when making that decision," he said.