Im in australia and I went out on stress leave as I was getting harassed and treated badly at my previous employer. I had a lot of trouble finding a job after leaving due to stress and was in and out of work for around 2 years I have since found out my previous employer is going around saying I sue him for 35 thousand dollars to other potential employers. I have a job now and my previous employer is still telling my current employer and other workers that I sued him What can I do

Do you have proof that will hold up in court? If you never sued your previous employer then you may have a claim. What is it you really want to do? You might also be able to get a order of restraint for your former employer to silence them.

... my previous employer is going around saying i sue him for 35 thousand dollars to other potential employers. ...

So what's the problem? I don't see that such an allegation, even if false, would damage your reputation.

... You might also be able to get a order of restraint for your former employer to silence them.
Prior restraint (http://en.wikipedia.org/wiki/Prior_restraint), being contitutionally suspect, is very difficult to obtain in the U.S. Of course since you are in Australia, the law on prior restraint may well be different.