The embarrassing climbdown came just hours before the Nationwide was due to implement its threat to sue Barclays if its plans to impose a pounds 1 charge from next month were not withdrawn before 5pm.
After a meeting at Nationwide's Swindon headquarters between John Varley, Barclays' head of retail banking, and Brian Davis, the Nationwide chairman, Barclays agreed to delay implementing the charge.
Mr Davis said after the meeting: "We believed that we had a good case. But going to court would have been expensive, and would have had risks for both sides. There are quite a lot of issues and at the end of the day they will be discussed".
Mr Davis said that had Barclays gone ahead, it would have forced other banks to start levying similar charges, leaving everyone worse off. Barclays and Nationwide are now calling for an urgent meeting of Link, the national cash machine network, to try to find a more durable solution to the charging issue.
Mr Varley argued that it was acting in the best interests of its customers in seeking to recoup the significant investment the bank had made in its cash dispenser network. Barclays still plans to scrap the disloyalty charge of pounds 1.50 it takes from customers using other banks' machines.
Mr Varley added: "What we are trying to do is to improve the position of our customers. What came out of our meeting was that he accepts and I accept that there are significant issues for discussion. Two of us slugging it out in court was not very productive. We explored some ideas together and we will be working with the Nationwide to find a solution," he said.
In a debate on the BBC's Watchdog programme last night, Mr Varley denied Barclays had lost its battle with the Nationwide. He said: "We have come to an agreement."
Mr Davies said he believed the cost of servicing bank customers at Nationwide cashpoints was covered by the 30p fee imposed under the Link system. Mr Varley disagreed, saying it cost Barclays more than 30p, but he gave no firm figure for how much he believed it did cost. He said Barclays would continue talks aimed at making cashpoint charges easy for consumers to understand.