The full-scale retreat came less than 24 hours before the action was due to start in the High Court today, with both agreeing to what Alan Rusbridger, the newspaper's editor, called a "substantial" contribution to its costs.
Mr Rusbridger said in a statement that the decision not to proceed "must be one of the most astonishing legal cave- ins in the history of the law of libel."
Mr Hamilton was suing over the paper's claim in October 1994 that he had accepted, without making declarations in the Commons register of MPs' interests, pounds 2,000 a time for tabling parliamentary questions on behalf of Mohammed al Fayed, the chairman of Harrods, and for accepting free hospitality at Mr Fayed's Ritz Hotel in Paris.
Mr Greer was suing over claims that he had acted as an intermediary.
One factor lying behind last night's decision is understood to be the rapidly deteriorating relations between the two plaintiffs.
It will come as no surprise to close observers of Mr Greer, who had sensed he wanted out. For his part, Mr Hamilton had evoked the ire of some Conservative colleagues for bringing the highly embarrassing case, with its "sleaze" ramifications and in which John Major had been subpoenaed to appear as a witness, during the party conference season.
After months of bravado on the part of Mr Hamilton, the humiliation was complete when he and Mr Greer paid a joint pounds 15,000 contribution to the Guardian's legal costs, which will run well into six figures in total. Mr Hamilton said in a statement last night that he was "devastated" at having to withdraw from the action to fight Mr Fayed's "uncorroborated" statements, "but since a conflict of interest has now arisen between me and my co-plaintiffs, it has become necessary to each of us to instruct new solicitors and new counsel."
He added: "Furthermore, I am not prepared to prolong indefinitely the appalling emotional stress which my wife has already suffered as a result of the article." Mr Hamilton's wife, Christine, acts as his secretary. Mr Hamilton, who secured a change in the constitutional rules covering MPs in order to proceed with the case, had been rumoured to have secured the agreement of Sir James Goldsmith, the leader of the Referendum Party, to underwrite some of his costs.
But he said in the statement that the trial would have had to be postponed to enable new sets of lawyers to prepare the case afresh at enormously increased cost. "My costs to date have exceeded pounds 150,000 and as a backbench member of Parliament I am simply not in a position to raise another substantial sum to duplicate those costs already incurred." Mr Hamilton said he would present evidence that he had assembled to the Commons Committee for Standards and Privileges and would write to Tony Newton, the Leader of the House, to reactivate the committee's at present suspended investigations.
While the Guardian is undoubtedly out of pocket, the climbdown is an unhappy contrast to Mr Hamilton's vow to expose "journalistic corruption and fantasy". Mr Rusbridger said that the only possible explanation for Mr Hamilton and Mr Greer "throwing in the towel" at the door of the court was that the evidence the newspaper had compiled to defend the case would have "revealed a pattern of parliamentary sleaze more far-reaching than we had ever imagined".
A spokesman for Mr Greer said the Guardian had approached his lawyers and Mr Hamilton on Saturday with a deal, and that the payment of pounds 7,500 each towards costs was a "token payment". A statement from Mr Greer said: "I totally refute that this decision to withdraw is an admission of the allegations made against me two years ago. This matter has gone on quite long enough and was fast turning into a media circus.
"I would want to continue on a matter of principle but I have had to take a sensible commercial decision and I am happy that a compromise has been reached."
A disappointed-sounding Mr Fayed issued two statements in quick succession, hitting back in the second at Mr Hamilton's allegations that he had no evidence to support his claims. A spokesman said: "He has not only given a full witness statement but there were statements given by three members and ex-members of his staff to corroborate what he said about the payments made to Hamilton, plus documentary evidence which proved those payments had been made."
In a sign that the affair will now be played out where it began, in Parliament, the statement said Mr Fayed would be happy to repeat his evidence before the Commons committee.Reuse content