The subcontractor accused of mistreating workers at an iPod factory in China dropped its libel suit against two reporters and the news organisation they work for in Shanghai.

Hong Fujin, the largest exporter of IT products in China, withdrew the libel suit yesterday, according to a statement. The lawsuit sought damages of 1 renminbi (about £0.07) from the two reporters and China Business News, over a 15 June story that alleged employees were worked so hard at the iPod factory that three women passed out on the production line.

The dropping of the suit comes just days after the press freedom group Reporters Without Borders asked the head of Apple to step in and mediate the disagreement. It also follows a Saturday report by the Xinhua News Agency that the Chinese government ordered Hong Fujin to allow its workers set up a trade union that would be affiliated with the ACFTU (All-China Federation of Trade Unions).

"The two sides have apologised for any difficulties created by this matter and agreed to work hand in hand to build a harmonious society and promote the hard work and rights of workers," Hong Fujin and China Business News said in a joint statement posted on the Taiwan Stock Exchange. The statement was posted by Hong Fujin's Taiwanese parent company, Hon Hai. The companies operate under the trade name Foxconn.

Hong Fujin declined to comment further on the matter.

Reporters Without Borders said Apple worked behind the scenes to resolve issue. The computer maker could not immediately be reached for comment.

Hong Fujin had sought redress through the defamation lawsuit after a whirlwind of bad publicity over allegations that it treated workers poorly. The China Business News story was one of many to follow in the wake of an article by the British newspaper The Mail on Sunday alleging long hours, low pay and poor working conditions at the Longhua site, which produces iPods as well as other IT products.

Apple investigated the claims, and found Hong Fujin in compliance with the majority of its requirements despite several violations of the company's supplier code of conduct, including unsatisfactory living and transportation conditions for workers. Hong Fujin is building new dormitories for workers and seeking ways to improve the way it buses employees from factories to dormitories.