Nestle, the world's largest coffee company, was forced into a humiliating climbdown yesterday after a wave of public outrage greeted its demand for a $6m (£3.7m) payment from the government of famine stricken Ethiopia.

The company promised to invest any money it receives from Ethiopia back in the country after receiving thousands of emails of protest in response to the story in yesterday's Guardian.

At an emergency meeting in its Swiss HQ last night, senior executives were mulling over the public relations damage. The claim represents about an hour's turnover for a company which posted sales of $59.36bn and pre-tax profits of $6.15bn last year.

Nestle - fearing a consumer boycott of its products across Europe - is considering donating some of the money it is demanding to help feed the 11 million Ethiopians who face starvation in coming months.

Campaigners last night repeated their call for the company to abandon its claim entirely. "I hope that Nestle reconsiders and realises they don't need the money as much as Ethiopia. I hope they drop the issue altogether," said Sophia Tickell, senior policy analyst at Oxfam.

However, Nestle was still insisting yesterday that it would benefit Addis Ababa to pay compensation for a company nationalised by a previous military government 27 years ago. The firm's German owners were bought by Nestle in 1986.

"It is in the Ethiopian government's interest to reach a deal as a way to ensure continued flows of foreign direct investment in the country," said Francois Perroud, a company spokesman. "We are flexible about the timing and the amount but we are not flexible about the principle."

The Ethiopian government has offered all it can afford in settlement - just $1.5m.

Nestle was boycotted for years by protesters over its aggressive sales of babymilk formula to the developing world, where hygiene standards made breast milk safer.

Last night campaigners were keeping up the pressure, although they warned that a boycott of Nestle products could backfire by hurting poor coffee farmers in Ethiopia.

"Boycotting Nestle products won't help the poor farmers who sell to the company," said Justin Forsyth, head of policy at Oxfam. "What people should do if they want to help is to write or email Nestle and ask them to drop the claim."

By late afternoon yesterday, 8,500 people had emailed the company to complain about its treatment of the Ethiopian government, the fastest response Oxfam says it has had to a campaign.

The aid agency dismissed Nestle's claim that Ethiopia will find it hard to attract foreign investors unless it pays the compensation bill. "This is absurd and unfair," said Mr Forsyth. "This is not about legal rights but what is morally right. When 11 million people face famine, exceptions should be made."

The World Bank is negotiating on Ethiopia's behalf with 40 companies who have similar claims against Addis Ababa, although Nestle's is believed to be the largest.

In a statement last night the company committed itself to invest the proceeds of the claim "in a long-term viable investment in Ethiopia which will contribute to the economic development of the country". Nestle also said it would respond to requests "to help alleviate the suffering of the population that is presently threatened by the food shortage".

Ethiopia is in the grip of a drought threatening 11 million with starvation. Some aid agencies have warned that looming food shortages could be worse than the devastating famine which killed a million people in 1984.

Other cash demands

· Booker plc is suing Guyana for £13m for a sugar company nationalised in 1976

· Uganda is being sued by Spanish bank Banco Arabe Espanol for £1.68m. A Ugandan court has ruled in the bank's favour, but Uganda is appealing

· British defence contractor, J&S Franklin is demanding £3.36m from Sierra Leone

· Ethiopia owes Bulgarian arms exporter Kintex £5.42m