The News of the World was forced to drop its allegation that Max Mosley requested a Nazi orgy after a dominatrix was too upset to give evidence yesterday.

Woman E was the only participant in a spanking party to have claimed that the son of the wartime fascist leader Sir Oswald Mosley had ordered a Third Reich theme.

Lawyers for the News of the World said that the newspaper had decided against calling her as a witness at the privacy hearing in the High Court after she said she was too distressed to give evidence.

They will still argue that the party had a Nazi theme, based on other evidence. The reporter who broke the story says that the military uniforms, lice inspection, intimate shaving and simulated rape all pointed to a concentration camp scenario and the court has been played an audio recording of a previous S&M party attended by Mr Mosley in which a woman begging for mercy says: “But we are the Aryan race, blondes.”

Mr Mosley, president of Formula One’s governing body, and four of the women at the party have told the court that it was only a prisoners-and-guards romp and that German was spoken because it sounded guttural and sexy.

Woman E was offered £25,000 to smuggle a secret camera into the party but the newspaper gave her only £12,000, blaming the “credit crunch” for its decision to halve her fee.

The story appeared on the front page under the headline “Formula 1 boss has sick Nazi orgy with 5 hookers” and a video of the party received more than three million hits on the paper’s website.

Mark Warby, QC, for the News of the World, told the judge, Mr Justice Eady, yesterday: “Her [Woman E's] emotional and mental state is such that it would not be fair or responsible or reasonable to give evidence. It is a most regrettable situation.”

Woman E’s husband was also dropped as a witness, Mr Warby said, because it was wrong to ask him to give hearsay evidence without calling her. The News of the World, which is owned by News International, the parent company of The Times, decided against calling any more journalists as witnesses after Colin Myler, the Editor, and Neville Thurlbeck, the chief reporter, spent more than a day in the witness box.

The judge will consider whether the human right to privacy should include sado-masochistic and paid-for sex. Mr Mosley gave £2,500 to the five women for an orgy in which his bottom was caned until it bled.

Woman E’s non-appearance caused sharp intakes of breath in the packed courtroom. Several newspapers had sent their best colour writers to record her account of her role play with the 68-year-old married man.

There was ill-tempered quarrelling between the leading counsel for both sides after Mr Warby, dropped his bombshell. The trial had been due to last until the end of next week, with a long list of witnesses expected to face gruelling cross-examination from Mr Mosley’s barrister, James Price, QC.

The right of privacy is a new feature of English law, derived from the European Convention of Human Rights. Damages awarded in the handful of cases so far have been extremely modest. The highest known rewards include those for the DJ Sara Cox (£50,000 for unauthorised pictures of her honeymoon) and the actress Sienna Miller (£37,500 for semi-naked pictures taken on a film set).

Mr Mosley is seeking a record sum. His lawyers say that the gross intrusion into his private life, involving such intimate and demeaning material, is unprecedented.

The case continues.

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