Equitable Life, the British insurer that nearly collapsed after a landmark House of Lords pensions ruling, has abandoned its £700 million legal action against its former auditors, Ernst & Young, with both sides agreeing to pay their own, substantial legal costs.

In what Ernst & Young's legal counsel described as "the biggest climbdown in English legal history", Equitable Life said its own advisers had told it to drop the claim on the grounds there was "too great a risk" that the judge would have ruled against it "as a matter of fact".

Equitable Life, which had already cut the size of its initial £2.6 billion billion claim against E&Y once, is still seeking £1.7 billion in damages from 15 of its former directors.

Total legal costs in the bitter dispute are expected to reach £60 million and Equitable has now returned a previous payment of £795,615.79 already made by E&Y.

E&Y described the decision as a "complete vindication" and accused Equitable of adopting bully-boy tactics in an "ill-conceived and badly prepared action".

As its expressed its "bitter disappoitment" at dropping the case, Equitable maintained that it still believed its auditors had been negligent in their advice.

However, the insurer, now run by chairman Vanni Treves, said it had been advised that the court would probably have ruled that, even if this were to be true, its former directors were still likely to have taken the same course of action.

The insurer shut its doors to new business and was brought to the brink of insolvency in 2000 after the House of Lords ordered it to meet financial guarantees offered to some of its policyholders in full.

Equitable, which subsequently faced a crippling bill from the policyholders of £1.5 billion, managed to stave off collapse under Mr Treves after securing a compromise.

He said today; "With great sadness and frustration, and following the receipt of firm advice from our legal team, the board has decided that settling our claim against E&Y now on this basis is the appropriate course of action.

"We remained confident of proving that Ernst and Young's audit was negligent; indeed, even its own independent financial experts (KPMG) were unable to fully support the basis of the audiit.

"But the evidence given by the former directors in court has persuaded us that there is too great a risk that the judge would find as a matter of fact that the former directors would not have done anything differently, whatever E&Y had done and said."

The thrust of Equitable's claim had been that the directors would have been forced to put the firm up for sale had they received the proper advice from E&Y.

However, in earlier court sessions all 15 of them testified that they would not have tried to sell Equitable even if they had received the warning from their auditors.

E&Y said: "Ernst & Young are pleased, but not surprised, by the decision today by Equitable Life to abandon its claim against EY which originated at £2.6bn. Equitable has dropped all claims against us without any admission of liability or concession on our part and has made us a payment in respect of costs."

Nick Land, the chairman, said: "Today’s news is a complete vindication for us. This was an ill-conceived and badly prepared action which we have said all along should never have been brought. We have been confident in the strength of our case from the very beginning and the trial continuously exposed the weaknesses of Equitable’s case.

"The past four years since the legal proceedings began have been a scandalous waste of time, money and resources for all concerned.

"The management of Equitable Life’s sole strategy has been to bully Ernst & Young into settlement by bringing a hugely inflated claim against us. Its attempt to pin the blame for Equitable’s problems on anyone with deep enough pockets was a disastrous misjudgement which has wasted tens of millions of pounds of policyholders’ money.

"Similarly, the claim against the former directors has caused considerable and unwarranted distress and cost to a group of individuals who were seeking to discharge their responsibilities in a conscientious and responsible way."

Equitable maintained that it had a duty to bring the action and is believed still to be confident over its claim against the former directors.

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