Nestlé, the world's largest coffee company, was forced into a humiliating u-turn last night, after public outrage forced it to drop its $6m claim against the famine stricken Ethiopian government.

After being deluged by 40,000 letters inspired by the Guardian's revelation of its demand for compensation over assets seized in the 1970s, Nestlé will today announce that it has decided to back down.

Talks between the company and the Ethiopian government this week resulted in Nestlé accepting Addis Ababa's offer of a $1.5m (£926,000) settlement, which will be handed straight over to the famine relief effort.

The Guardian's editor, Alan Rusbridger, said it was a triumph for the power of public opinion. "After the Guardian first exposed the company's plans, over 40,000 people wrote to Nestlé outraged at their claim on the Ethiopian government," he said. "Corporate greed has buckled in the face of adverse publicity and direct action."

Senior representatives from Nestlé are expected to sign a deal today with the Ethiopian government. In a statement last night, the giant food and beverages company said it was not interested in taking money out of a country confronted with famine and that it was exploring other ways it could be of assistance to the Ethiopian government.

Today's move represents a considerable climbdown for the company, which initially dismissed the Guardian story. Nestlé insisted the compensation issue was "a matter of principle" and that it was in the best interest of Addis Ababa to settle the demand to repair its record with foreign investors.

The company's top executives were forced to rethink their strategy after assessing the public relations damage from the claim, which represents one hour's turnover for the firm. It posted sales of nearly $60bn last year.

Oxfam, which led the campaign to get Nestlé to back down, said it was a victory for Ethiopia and the public.

"This is a welcome result because it shows that Nestlé is not immune to public pressure," said Phil Bloomer, a senior policy analyst. The aid agency said that the company, which makes profits of up to 40% on its instant coffee brand, should now consider paying Ethiopia's farmers a better price for their coffee. "Now Nestlé has got another challenge to prove today's decision was not just a face-saving exercise: it must demonstrate a commitment to ethical purchasing by eliminating the misery at the bottom of its supply chain," said Mr Bloomer.

Oxfam blames the 50% fall in world coffee prices over the last three years for some of the strains on Ethiopia's economy, which have brought nearly 11 million people to the brink of starvation. Coffee accounts for two-thirds of the country's export earnings.

Ethiopia is one of the world's poorest countries, with an average income of less than $2 a day. Several years of poor rains have left it facing its worst drought in 20 years and some aid agencies have warned that the situation could be even worse than the 1984 famine, which prompted Live Aid.

Nestlé's claim dates back to the 1970s when the military regime in Addis Ababa seized the assets of foreign companies. Ethiopia's current government is trying to settle with foreign business, but faces demands for up to $500m from 40 claimants.