Australia's competition regulator has dropped legal action against Google's Irish subsidiary but will continue with its lawsuit against its parent for allegedly misleading web users.

The Australian Competition and Consumer Commission (ACCC) last month sued Google, Trading Post Australia, Google Ireland Ltd and Google Australia Ltd.

The regulator yesterday agreed to drop the action against Google's Irish and Australian subsidiaries after submissions by the parent that any ruling against it would be put into effect by the units, according to a statement on the commission's website.

Google allegedly engaged in "misleading and deceptive conduct" by not adequately distinguishing sponsored links paid for by advertisers from organic ones derived from its search technology, the regulator said last month.

The commission also accused Google of displaying links to the website of Trading Post that included the names of two rivals of the online retailer, suggesting a business relationship existed when there wasn't one.

Trading Post sells mainly second-hand items ranging from cars to caravans.

The commission alleged in 2005 that Trading Post bid on the business names "Kloster Ford" and "Charlestown Toyota" in an attempt to drive traffic to its own site using Google's Ad Words programme. Kloster Ford and Charlestown Toyota are car dealerships in the New South Wales city of Newcastle which compete against Trading Post.

Telstra, Australia's largest telephone company, bought Trading Post for A$636 million (€399 million) in 2004.

The ACCC claims it is the first case of its kind anywhere in the world. The case is likely to be closely watched by internet companies as sponsored advertisements are a major source of revenue for search engines and other online businesses.

It is scheduled to return to Australia's Federal Court on November 16th. Google employs more than 1,000 staff at its Dublin offices.