Monsignor Joseph Creegan had threatened to expose scandals in the Catholic Church in Scotland, including priests' secret homosexual liaisons and alcoholism.
But now he has ditched the unfair dismissal action only two weeks before the hearing was due, prompting speculation he has been paid off.
Creegan, 66, lost his job in Dunkeld diocese on Tayside after his mistress confessed all to their bishop.
His employment tribunal was scheduled to begin on August 25 and last three days.
Creegan, who said he had an explosive dossier on senior clergy, has told friends he had no option but to walk away as the cost outweighed any potential award.
The tribunal would have had to base any award to Creegan if he won his case on his salary of £30 a week, meaning the sum involved would be a pittance.
A spokeswoman for the diocese refused to comment yesterday when asked if Creegan had been given any diocesan funds.
She would only say: "We are aware that the monsignor has abandoned his claim and Bishop Vincent Logan now considers the matter closed."
It was revealed in June that Creegan had shocked the Vatican by taking his church to court.
His lover, a married parishioner, went to the bishop with evidence of their relationship after it was revealed he had become close to another married woman.
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