The Office of Fair Trading was forced into a humiliating climbdown today, apologising to supermarkets giant Wm Morrison for incorrectly accusing it of colluding to fix prices on dairy products.

It is paying Morrisons £100,000 plus its legal costs - an unprecedented move for a regulator that has recently taken a get-tough approach to big business.

The decision is a major embarrassment for OFT chief executive John Fingleton, who imposed £237 million of fines last year, leaving major industries claiming he was a publicity seeker who was unfairly targeting large companies.

Click here for the full OFT statement

The OFT issued a "provisional decision" against the supermarkets last September, saying they fixed prices on milk, butter and cheese in 2002 and 2003, costing consumers £270 million.

A group of supermarkets and dairy firms agreed to pay fines of £116 million to settle the case, but made clear they thought the finding unfair. The investigation stunned the industry, which argues it had increased the fees paid to farmers for goods after coming under intense pressure from the Government to raise prices to help agriculture.

Sainsbury's paid £26 million but said it was "disappointed to have been penalised for actions that were intended to help British farmers". Tesco and Morrisons vowed to fight the allegations, claiming they had been found guilty before evidence had been heard.

In the original statement, OFT executive director Sean Williams said the case was "very serious" and "this kind of collusion on price is a very serious breach of the law".

Today it said the quotes from Williams "were not intended to suggest that the OFT had concluded that Morrisons was guilty of price-fixing". Tesco boss Sir Terry Leahy earlier lambasted the OFT for the way it handled the investigation, saying: "I think it would be good if it did the press releases and interviews at the end of the inquiry rather than the beginning."

Rival supermarkets were delighted that Morrisons had won a victory. One retailer said: "Good on them. There are an awful of investigations into supermarkets - it is the most regulated industry there is. It is encouraging that the OFT has had the courage to say it was wrong."

The OFT insists there is no chance Williams will be asked to resign but said it could not elaborate on the case for legal reasons. It says its probe into the price-fixing allegations will continue.

It is not yet known if a similar apology for Tesco is on the way. The Competition Commission is due to publish its latest report into the grocery sector later this month.