Four articles published in 2002 in London had claimed Shaikha Mouza al-Misnad interfered in political, judicial and security matters in Qatar and dealt secretly with Israel.
But in an out of court settlement on Tuesday, the newspaper and its editors accepted "there was no truth whatsoever in any of the allegations they had published", according to a statement read in court.
Shaikha Mouza's lawyers said on Tuesday they had produced documents which showed Azzaman was controlled by Saudi Arabian intelligence paymasters who used the paper as a mouthpiece for a propaganda campaign against neighbouring Qatar and its leadership.
The documents also showed that Azzaman executives set up a Centre for the Defence of the Press and Intellectual Freedom in the Arab World intended to attract Saudi dissidents in exile so Saudi authorities could monitor them.
Speaking to Aljazeera.net on Tuesday, al-Misnad's solicitor -Cameron Doley - said the Saudi publication had printed four articles during the summer of 2002 containing a wide array of untrue and extremely serious allegations.
"But after we showed Azzaman was the mouthpiece for black propaganda, the paper capitulated almost immediately and agreed to meet Shaikha Mouza's long-standing requirements for settlement."
Out of court settlement
Edited by Iraqi national Saad al-Bazzaz, the paper agreed to settle out of court, agreeing to publish a front-page apology and pay more than £500,000 in damages and costs for allegations published in June and July 2002.
Doley added that, by British libel case standards, half a million pounds was "an enormous" amount to have agreed upon.
But Azzaman's editor and publishers had never argued that the allegations were true.
They said they were based on material from reliable sources, which Azzaman as a "serious and independent newspaper" had a duty to share with its readers, citing the legal defence of qualified privilege.
Saad al-Bazzaz was an adviser to
Uday Hussein in the 1990s
In view of the documents showing Azzaman's links to the Saudis, Justice David Eady ruled that the daily could not claim protection on the grounds that it was an independent newspaper.
And London-based Saudi dissident Saad al-Faqih added that "there is no way Azzaman can be considered a serious newspaper, but a means for the Saudi government to blacken the reputations of its political enemies".
"Indeed, it is papers like these and the fronts they back that send intelligence agents posing as Saudi dissidents to spy on reform movements like ours," he added.
And the judgment, and documents admitted by the court, reveal the animosity between Saudi Arabia and Qatar, which both belong to the six-nation Gulf Cooperation Council, and the role played by Saudi intelligence in trying to discredit its neighbour.
Saudi embassy officials could not immediately be reached for comment on the case. Al-Bazzaz was also unavailable for comment.
Not so neighbourly
Saudi Arabia and Qatar have long been at odds. Qatar reported border skirmishes in October 1992, saying Saudi Arabian forces had killed two of its soldiers.
It incurred more Saudi wrath when the present amir, Shaikh Hamad bin Khalifa Al Thani, deposed his father in a bloodless coup in 1995. Doha accused Riyadh of backing a failed attempt to reinstate the former ruler the following year.
Qatar has ruffled feathers in Saudi Arabia and elsewhere in the Arab world by hosting the satellite television channel Aljazeera and promoting social and political reforms.
Shaikha Mouza, an active advocate of women's empowerment and other causes, will donate the damages to two charities, Medical Aid for Palestinians and an Iraqi education fund, her lawyers said.
Al-Bazzaz held senior media positions in Iraq during Saddam Hussein's rule until his defection in the 1990s.