An unprecedented £850 million lawsuit brought by the liquidators of the Bank of Credit and Commerce International (BCCI) against the Bank of England collapsed spectacularly today, with the UK's central bank vowing to seek the highest compensation possible.

It had been alleged by Deloitte, the liquidators, that the Bank of England had ignored the misdeeds that led to the downfall of BCCI in 1991. BCCI collapsed with debts of $16 billion (£9bn) in what is now considered to be the biggest banking fraud in history.

As the Bank of England is legally protected from negligence claims, Deloitte had pursued the stronger claim that 22 officials were guilty of "misfeasance" - a breach of duty. Last month the Bank rebuffed an approach to settle the case.

The charges, against the Bank and 22 of its present and former staff, were unconditionally withdrawn in the High Court. Lord Justice Tomlinson said the case against the Bank was "wholly without foundation".

Mervyn King, the Governor of the Bank of England, said: "There has never been a shred of evidence to support these disgraceful allegations, and the case has collapsed as we always expected it would.

"The foolish determination to pursue a hopeless case for so long has also led to a huge waste of creditors’ and taxpayers’ money, and I hope everyone concerned will take a close look at how and why such a very weak case took 12 years to come to an end," he added.

"The Bank will be seeking the largest possible compensation for its costs."

The shock end to the case, which is though to have cost the Bank up to £100 million, was described as "the most remarkable and humiliating climbdown in the history of English litigation" by Nicholas Stadlen, the Bank’s counsel.

Deloitte said it dropped the case after the Chancellor of the High Court said that "it was no longer in the best interests of creditors for the litigation to continue."

BCCI collapsed in 1991 with debts of $16 billion. Litigation started in 1993, but only reached the court in January 2004 - the first lawsuit filed against the Bank of England in its 300-year history.

"The case has continued far longer than anticipated, with far greater costs than expected, and it could continue for several years to come... and involve further enormous costs," admitted Deloitte, which was trying to win compensation for BCCI’s 6,000 creditors and depositors.

Deloitte said it has spent about £38 million to pursue the case and that creditors have so far recovered nearly $6 billion from the liquidation.

Last month, Ernst & Young successfully defended in a £2.7 billion action brought against them by Equitable Life in a similar dispute over commercial responsibilities for corporate losses. Clare Canning, the head of Commercial Litigation at City lawyers Barlow Lyde & Gilbert, who represented E&Y in that case, said of today's BCCI development: "The collapse of this case highlights the pressures on liquidators and their advisers.

"They apparently feel obliged to pursue claims irrespective of a commonsense view of the likely return to creditors."

BCCI, after its foundation in 1972 by Agha Hassan Abedi, a Pakistani banker, eventually grew to span 69 countries and accounted for $20 billion in assets.

It was closed in 1991 after a worldwide investigation, partly organised by the Bank of England, when regulators discovered the lender had disguised losses and was insolvent.

At the heart of the legal case was that the Bank of England granted a licence to BCCI to operate in the City of London in 1980, but did not take over actual supervision of it because it was registered in Luxembourg, despite having a London headquarters.

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