Guardian Care Homes had alleged that the bank had mis-sold it two interest rate swaps worth £70m that were linked to Libor, the benchmark interest rate used to price financial products worth about £300tn around the world.
The case was being watched closely by the banking industry, which is already making compensation claims to customers mis-sold interest rate swaps, amid fears that it could encourage more customers to bring cases linked to Libor.
Barclays argued that the swaps bought in 2007 and 2008 cost it millions of pounds as interest rates fell following the 2008 banking crisis.
Diamond, who is now building a banking business in Africa, left Barclays in July 2012 in the wake of the furore caused by the bank's £290m fine for rigging Libor, the first significant penalty for attempts to manipulate the rate, but one that has since been eclipsed by rival banks.
He and others, including the former co-heads of the investment bank, Rich Ricci and Jerry del Missier, were also possible witnesses in the high court when the trial was due to begin at the end of this month.
But a settlement has been reached under which Barclays will restructure a loan, thought to be worth about £40m, to Guardian Care Homes' owner, Graiseley. This led to the legal action being dropped.
A Barclays spokesman said: "In response to discussions with Graiseley, in order to support the ongoing viability of Graiseley's care home business, the parties have agreed to a commercial restructuring of Graiseley's debt, which reflects the impact of changes in conditions in this sector over the last few years. Graiseley has withdrawn the litigation."
Graiseley did not immediately comment.
Until last week, Barclays had been arguing that the case, which had already involved a string of court appearances, was "without merit", and argued that the care homes operator owed it £70m.
The Libor element of the proceedings had been added after Barclays was fined for rigging the benchmark rate and the case had been delayed while the bank failed in its attempts to have this element thrown out.
Among the twists and turns of the proceedings were those in January last year, when the court had ordered the identities of more than 100 current and former employees of Barclays to be revealed despite their attempts to remain anonymous. They included the former finance director Chris Lucas and Diamond's predecessor John Varley, whose emails were scrutinised during the regulatory investigation that led to the fine.
At the time, the bank and the judge stressed that this did not mean those individuals were involved in rigging Libor.
Court papers released during the proceedings also appeared to suggest that a Barclays investment fund operated by a Singapore trader had been manipulating Libor, although the bank had argued the evidence was not relevant.
It was the first trial related to Libor to reach the courts and was due to carry on for a number of weeks, during which time a number of former and current Barclays employees were thought likely to be called at witnesses. It is believed Barclays' legal bill to defend the case has already amounted to more than £10m.
Since Barclays was fined for Libor rigging, a number of other banks have been fined, including Royal Bank of Scotland, which paid £390m to regulators in the UK and US, Swiss bank UBS, which was fined £940m, and Dutch bank Rabobank which was fined £662m.
Money broker Icap was fined £55m, while regulators are continuing their investigation into the manipulation of the rate. A number of individuals have also been charged for Libor rigging in cases brought by the Serious Fraud Office, including three from Barclays who were charged in February.
Banks have set aside more than £3bn to settle potential cases of interest swap mis-selling, following a review of their selling practices conducted by the Financial Conduct Authority.
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