The Independent Working Class Association will use a £15,000 libel payment from the Oxford East Labour Party to fight May's city council elections.

Francesca Debenham, left, hands the cheque to the IWCA's Claire Kent and Stuart Craft

Yesterday, IWCA leader Stuart Craft picked up a cheque from solicitor Francesca Debenham, of London law firm Carter-Ruck.

Oxford East Labour Party decided to settle out of court after deputy city council leader Bill Baker posted defamatory material to homes in the run-up to last May's local elections.

In an issue of Boundary Brook News, which was delivered to houses in the Donnington Bridge area, Mr Baker, who represents the Iffley Fields ward, alleged the IWCA had links to violent extremists and Irish nationalist groups under the headline "Watch out for extremist group".

The Labour Party has refused to comment on the allegations or the payment to the IWCA. The IWCA, which saw Mr Craft elected as its first councillor in 2002, hired London firm Carter-Ruck on a no-win, no-fee basis. Carter-Ruck, which has a reputation for winning libel cases, lists Yusuf Islam (formerly Cat Stevens), Jude Law, Chelsea Football Club and Ewan McGregor among its clients.

The case is one of just a handful where two political parties from the same local authority have fought a defamation case. Not only does Labour, which controls the council, have to pay the IWCA's legal costs, it is effectively funding the IWCA's election campaign, which could see the movement gain some of Labour's seats when half the council's 48 seats are up for grabs in May.

Mr Craft said: "As soon as Carter-Ruck took on the case we knew we would win, because there was not a shred of evidence to back these spurious allegations.

"This will go a long way to evening the score come next May's elections. All we have ever asked for is a clean fight.

"We like a good political row, but what was said was just nonsense and definitely had an impact on the election results last time round."

The IWCA hopes to double its number on the city council to six and is targeting Alex Hollingsworth's Barton and Sandhills seat, Susan Brown's Churchill seat and veteran Bill Buckingham's Rose Hill and Iffley seat.

Part of an apology to the IWCA said: "In this article Bill Baker wrongly alleged the Independent Working Class Association has links to extremist anarchist groups and violent Irish nationalist groups, and that the organisation has tried to hide those links behind legitimate political activities.

"The Labour Party and Bill Baker accept that these statements are incorrect and without foundation and would like to apologise for the distress and embarrassment which the article has caused."