A libel action against the Newcastle Evening Chronicle has been settled out of court by two nursery nurses wrongly accused of child abuse in a council report.

The pair were acquitted at Newcastle Crown Court of indecently assaulting a number of young children in their care.

But the city council pressed ahead with its Abuse in Early Years report, which concluded there has been sexual, physical and emotional abuse.

The Chronicle published the report's findings under Qualified Privilege. This legal defence is intended to encourage freedom of expression by protecting publishers from libel actions where matters of great public importance are being reported on in good faith, in the public interest, and without malice.

The Chronicle defended the case against it on the basis either that the allegations in the council document were true, or if the allegations were not true, it had published under the protection of Qualified Privilege.

The articles, which appeared in 1998, resulted in two libel actions in late 1999 from Christopher Lillie and Dawn Reed, whose lives were blighted by the council's untrue allegations.

The pair - now recognised as innocent citizens - launched one libel action against the Evening Chronicle and the other against the city council and the four-member review team responsible for the report.

And last week they were each awarded maximum libel damages of £200,000 against the council as their names were cleared.

Explaining the Chronicle's settlement, editor Paul Robertson said: "After six weeks or so, the Evening Chronicle's QC was contacted by the QC for Mr Lillie and Miss Reed.

"Our QC was told that Mr Lillie and Miss Reed were prepared to settle the claim against the Evening Chronicle if we made a contribution to their legal costs, promised not to repeat the allegations contained in Abuse in Early Years, and promised to report the outcome of the case against the Council and the Review Team.

"As anyone who has ever been involved in litigation will know, predicting the outcome of a High Court trial is very difficult, no matter how optimistic you are about the strength of your case.

"The Chronicle and its lawyers were always confident that the technical defence of Qualified Privilege would succeed, but as nothing is ever certain in litigation, we decided to accept the offer.

"The reason for doing so was that we were only being asked to contribute to the costs of Mr Lillie and Miss Reed: we were not asked to pay their costs in full, we were not asked to apologise for repeating the Review Team's false allegations, and we were not being asked to pay any damages.

"In the last few days, we have reported the outcome of the case against the Council and the Review Team in detail, as we promised to do. Even if this had not been part of the settlement of the claim against us, we would have reported it.

"The Review Team perpetrated a gross miscarriage of justice on Mr Lillie and Miss Reed by making these false allegations against them, and we had unknowingly contributed to that process by publishing details of the report.

"Mr Lillie and Miss Reed had been greatly wronged, and when Mr Justice Eady held that they were totally innocent, it went without saying that we had a moral obligation to them and to our readers to report this important decision.

"The Evening Chronicle was innocently caught up in the Review Team's malicious campaign against Mr Lillie and Miss Reed, and in the light of the terms of the settlement of their action against the Chronicle, we think that Mr Lillie and Miss Reed recognised this."

Read the Chronicle statement in full.