The Franklin Mint has a range of Diana memorabilia

The Franklin Mint accused the fund of making an earlier malicious prosecution and started legal proceedings against it for $25m (�15m).

As a result of the action the fund had to freeze its funds on Friday, putting 500 jobs and grants to more than 120 beneficiaries at risk.

The company, which produces Diana merchandise including dolls, plates and jewellery, says it has now restructured its lawsuit so grants can be released to the charities concerned.

The fund and Diana's estate had argued the Mint's production of a "limited edition commemorative plate" soon after her death in 1997 violated their "exclusive rights" to her name and image.

There is no longer any reason for the fund to continue withholding the �10m in already promised grants Franklin Mint

The action was thrown out in 2000 after being labelled "groundless and unreasonable", leaving the fund with a �4m legal bill.

The company claims the action was an attempt to damage its "sales efforts, embarrass it and sully its reputation".

As a result of the Mint launching its legal action, the fund said it was "legally obliged to freeze not only new grants but payment of existing grants".

Charities who get grants from the fund said the financial crisis could be crippling.

'Unpopular causes'

Over the past five years the fund has made �50m of awards and many of its 120 beneficiaries are "unpopular causes" which say they will struggle to find alternative funding.

The fund's chief executive, Dr Andrew Purkis, told the BBC about �10m was needed to honour existing commitments.

It had asked to borrow money from other charitable bodies in an attempt to keep its projects going.

In a statement the Mint said it had decided to limit its claim for damages.

"This means the Franklin Mint guarantees to make no claim against the �10m in grants the fund has already committed to a variety of worthy causes," it said.

'Desperately need'

"There is no longer any reason for the fund to continue withholding the �10m in already promised grants.

"The fund's Trustees should honour their promises and release these monies immediately to the groups that so desperately need them."

A fund spokeswoman said it was still waiting to hear from Franklin Mint officially via their lawyers before "raising the hopes" of beneficiaries.

The fund was set up to help the causes Diana campaigned for.

The organisations it supports include bodies helping vulnerable young people, prisoners' families, refugees and asylum seekers in the UK.

It also helps charities trying to protect people from landmines and ease the suffering of the terminally ill in some of the world's poorest countries.