The deal was made by the Manufacturing, Science and Finance union after the employment tribunal chairwoman, Enid Prevezer, halted the proceedings on Thursday.

Ms Solomon, who earned £19,500 in her former position as secretarial assistant to Nelson Mendes, the head of finance, was suing the union for wrongful and unfair dismissal. She claimed she had seen copies of cheques totalling nearly £35,000 from false union accounts payable to Mr Lyons and Mr Mendes and both had access to a £160,000 defunct account.

The deal involves the MSF union paying £50,000 plus VAT to cover the legal expenses of the GMB union, which defended its former shop steward. The MSF is also agreeing to take no action against any of its staff who acted as witnesses for Ms Solomon.

In a statement released yesterday the MSF said: "The par ties have agreed an out of court settlement. They each maintain their respective position but have agreed that it does not serve the interests of the members of both their unions to continue litigation."

Celebrating outside the tribunal, Ms Solomon said: "I regret having had to take the MSF to an employment tribunal as I always considered it to be an excellent organisation, not least in its campaign to provide protection for whistle blowers.

"However I maintain that I saw what I saw and acted in good faith when I brought my concerns to the attention of John Chowcat, the then assistant general secretary of the MSF. I therfore regard the settlement as a vindication of my position."

Richard O'Brien, the MSF spokesman, admitted the union could not continue because under the government's whistleblower legislation it had to prove that Ms Solomon had acted malicously. It is understood that it was over this key point that the chairman of the tribunal halted proceedings.

MSF maintains that Ms Solomon still had no evidence against Mr Lyons and Mr Mendes over the alleged £160,000 fraud and that the union's accountants, bankers and the independent trade union certification officer had cleared both men.

Mr O'Brien said yesterday that as a result of the hearing senior union officials were reconsidering their position on two former employees who are taking the union to tribunals. Howell John, a regional officer, is suing for unfair dismissal this month. Mr Lyons is also facing action from his former chauffeur, Bryan Keegan, for unfair dismissal after he won a £7,000 back claim for unpaid overtime.

The cost of the episode, including a £250,000 payment to Mr Chowcat and the commissioning of a report from the union's accountants, is thought to be around £500,000.

General secretary faces further tribunal allegations by chauffeur

When Tony and Cherie Blair entertained Roger Lyons at Chequers last month in their quest for trade union cash for New Labour, they could not have expected their dinner guest suddenly to become embroiled in allegations of fiddled expenses and false bank accounts.

Yet the climbdown in the Marcia Solomon whistleblower case by the Manufacturing, Science and Finance union has left unanswered questions about the way the union was run and how it spent its 400,000 members' subscriptions.

Allegations made during the hearing were in Ms Solomon's words " only the half of it". And Mr Lyons's former chauffeur, Bryan Keegan, made allegations in a document submitted to the tribunal, of how Mr Lyons and his family were driven about on private rather than union business.

Mr Keegan says he regularly took Mr Lyons's younger children to school, his daughter to work, and his boss and sons to Arsenal matches. He also disclosed that Mr Lyons has two vehicles paid for by the union: a Ford Mondeo for his wife, and an Vauxhall people carrier .

He says he once took Mr Lyons and his two sons to Hillsborough to watch Arsenal play Sheffield. After, he says, he drove Mr Lyons to a conference at Blackpool and his sons returned by train - using tickets the chauffeur had obtained the previous day using MSF rail warrants.

He alleges regularly chauffering Mr Lyons' Arsenal season ticket to friends' homes when the general secretary could not go, and twice taking Mr Lyons and his family to and from Heathrow and Luton airports on private holidays.

His most serious allegation contradicts Mr Lyons's evidence on the purchase of £831 worth of alcohol for a MSF national executive reception - which Mr Lyons told the union's accountants was spent entirely on union entertainment for the executive and the press. The chauffeur says he "carried four boxes of alcohol to his home, where I stacked them in his hallway".

A union spokesman confirmed Mr Lyons was regularly chauffeured to football matches, but said it was "a reciprocal agreement" with the chauffeur who could then go to his nearby home. He said he had no knowledge of the rail warrants or drink.

After the revelations in Ms Solomon's tribunal hearing, yesterday officially the union was maintaining that Mr Lyons had been totally cleared of breaking rules over the alleged use of thousands of pounds of expenses, and his actions were above board.

Yet an internal MSF memo submitted to the tribunal shows that two union figures believe the opposite. The memo by John Gardner and Bob Braddock, chair and vice chair of the MSF national executive's finance committee, said: "With regards to the general secretary, whilst we are disappointed to [sic] some of his actions he has taken, having taken legal and professional advice we reluctantly accept that the use of disciplinary procedure would not be appropriate in this instance. "

In a fortnight more allegations are expected when Howell John, a regional officer, goes to a tribunal. The chauffeur is also going to a tribunal and intends to make more allegations.