Palantir and the London mayor, Sadiq Khan, have called off their legal fight over claims the Labour mayor was blocking the US tech company from signing a contract with the Metropolitan police because of its values and ethics.

Palantir and the mayor’s office for policing and crime (Mopac) announced on Wednesday they had withdrawn allegations against each other, heading off a high court trial scheduled for January.

Palantir sued Mopac in June after Khan stepped in to block it from awarding Palantir a two-year, £50m deal for Scotland Yard to use AI to process intelligence in criminal investigations in a system called unified operational analytics (UOA), citing a “clear and serious breach” of procurement rules.

With Palantir also working for the Israeli military and for the Trump administration in its immigration crackdown, Khan has previously said Londoners only wanted to see public money being paid to companies that “share the values of our city”.

Louis Mosley, who heads Palantir in the UK and Europe, responded by accusing Khan of politicising procurement and said he was “putting politics above public safety”. He said: “What Londoners value is not being mugged, not being raped by a serving police officer.”

The agreement to drop the claims against each other comes a month after Palantir hired Tom Watson, the former Labour party deputy leader, as a full-time lobbyist. The firm was concerned that if public authorities were able to block it from winning contracts due to objections over the values of its senior leadership, it would undermine its ability to operate in the UK.

Palantir is facing a battle to retain its £330m NHS medical data contract amid a vociferous campaign from parts of the public and some MPs for it to be replaced by a less controversial company.

Palantir and Mopac said in a joint statement that Mopac’s decision in May to block the contract “was not based on Palantir’s values or ethics or any wider reporting about the company”.

“Mopac recognises Palantir’s concerns that media reporting of a statement from the mayor’s spokesperson before the decision was taken could have incorrectly created the impression that an assessment of the company’s values had been a factor in that decision,” it said.

“Mopac’s consideration was based upon its statutory role of examining spend proposals, against the appropriate legal tests and the relevant guidance on procurement, governance, affordability and ensuring value for money for Londoners.”

Khan said: “London is the technology capital of Europe, and I am proud that leading software firms choose the city as their home. Palantir makes a significant contribution to jobs and investment in the capital, employing a large number of Londoners whose services have been procured legally by organisations across the UK and beyond.”

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Watson said: “The mayor and his team have recognised their actions could have created the impression that the decision to block the UOA contract was based on Palantir’s values. I’m very pleased that they have today corrected any such impression, and that even in the face of extreme provocation from highly organised pressure groups, decisions about deploying technology can still be made on their merits and in the public interest.”

A new procurement process for the £50m police tech deal is under way and Mopac has agreed to treat Palantir “fairly and equally” if it bids, as expected. Equally, Mopac is not bound to agree to Palantir’s appointment.

Each side is covering its own legal costs, no admissions of liability are made and no damages have been paid.