The Department for Work and Pensions (DWP) has offered to restore the full benefits of a claimant whom it called a “lying bitch” in legal papers after she appealed against a decision to strip her of some of her disability entitlements.

The DWP has apologised to the woman and, following outrage when it emerged the insult had been inserted into appeal tribunal papers, has said it no longer plans to cut her Personal Independence Payment (PIP) entitlement.

It also said she would be considered for a “consolatory payment”, issued in exceptional cases where departmental action had resulted in claimants suffering “gross embarrassment, humiliation, unnecessary personal intrusion and … severe distress”.

The incident, which was revealed with the claimant’s permission last month by her welfare advice worker, was condemned at the time as exposing “a canteen culture of contempt among many decision makers at the DWP”.

The DWP’s offer to the claimant to drop its previously vigorous defence of the original PIP decision is likely to be seen as a damage-limitation exercise, amid continuing scepticism over the accuracy and reliability of disability benefit assessments.

Just a fortnight ago, the DWP was preparing to go to court to defend its PIP decision in the case – in effect arguing the woman was not disabled enough to claim mobility support. It had already reviewed the case internally in a process called mandatory reconsideration and upheld the initial assessment.

However, since the Guardian reported the case, the department has hastily reconsidered its verdict after yet again reviewing the available medical evidence. It has apologised to the woman and told her it would like her to agree to close the case before it is brought before a judge at tribunal.

A redacted copy of a letter, again published with the woman’s permission on the Rightsnet website by her advisor, Derek Stainsby, of Plumstead Community Law Centre, reveals that a DWP official wrote to the woman earlier this week offering “sincere apologies” for the distress the incident had caused her.

It said: “I want to assure you the department takes these matters extremely seriously. We expect the highest standards of professionalism from all colleagues and are thoroughly investigating the circumstances brought to our attention. Whilst I cannot go into the details I want to assure you that appropriate action will be taken once that investigation is concluded.”

It continued that officials had “fully reviewed” her case, using a range of evidence already in its possession, and concluded that “you are entitled to mobility [payments] at the standard rate in addition to standard rate for daily living” – the benefits she was entitled to before she was reassessed.

The woman has yet to decide whether to accept the DWP’s offer to drop the tribunal case and reinstate her contested benefits.

The offending passage was contained in the DWP’s submission to her PIP appeal tribunal. In it, an official questioned whether she was genuinely entitled to a carer’s allowance, a benefit for people who care for another person for at least 35 hours a week.

The official wrote: “In this lying bitches [sic] case she is receiving the mid-rate carers [sic] allowance component for providing day time supervision to another disabled person. The tribunal may wish to explore this further.”

A DWP spokesperson said: “We have apologised for any distress caused and are thoroughly investigating this matter. Any behaviour like this is completely unacceptable and we will take appropriate action against any staff who breach our clear standards.”

Last month the thinktank Demos called for the DWP to be stripped of its responsibility for providing disability benefits because it said years of failings have eroded trust among ill and disabled people.

There is widespread concern that PIP assessments, which are carried out by private firms on behalf of the DWP, are inaccurate and unfairly discriminate against mentally-ill claimants. Nationally, at least 70% of appeals against PIP decisions are successful.

• This article was amended on 15 and 17 April 2019. The headline was amended to reflect the Guardian’s style guidance around disabilities. In addition, an earlier version misnamed the Department for Work and Pensions as the Department of Work and Pensions. This has been corrected.