`Neo-Nazis Drown Boy" was the headline that broke the story. For two weeks last November the small town of Sebnitz on the German-Czech border was overrun with journalists, all trying to answer the question that haunted Germany: why did no one intervene when a gang of neo-Nazis drowned a six-year-old boy in a swimming pool?

The answer emerged last month: because it didn't happen.

The newspaper that broke the story has published a full retraction, and the German Chancellor, Dr Gerhard Schroder, who spoke out against the alleged attack, had a lot of explaining to do when he visited Sebnitz last week.

The story was sensational. On a sunny day in June 1997 six-year-old Joseph Kantelberg-Abdulla was set upon by a gang of neo-Nazis at the open-air pool in Sebnitz, according to Bild, Germany's bestselling newspaper.

None of the 300 people at the pool that day intervened, and no one interviewed later by police mentioned the neo-Nazi gang, Bild said.

Ms Renate Kantelberg-Abdulla, the boy's mother, told Bild she was unhappy with the official investigation that attributed the death to accidental drowning.

She interviewed people at the pool that day, and Bild printed the shocking witness testimony she gathered, telling how a gang of neo-Nazis beat Joseph, drugged him and shocked him with an electric stunner before drowning him in full view of other bathers.

The story shocked a country already numb after a summer of violent anti-foreigner attacks. But the victims were always adults. The death of a child appeared to expose a degree of cruelty and ruthlessness unexpected even of neo-Nazis.

As the German media descended on Sebnitz, Dr Schroder met Ms KantelbergAbdulla at the SPD headquarters in Berlin.

"Like any law-abiding citizen, I am appalled by the thought that this boy may have been murdered by right-wing extremists," he said. "If this is really the case, it will have been one of the most hideous crimes in Germany for a long time."

But it wasn't. Days after the story broke, supposed witnesses to the drowning admitted they had lied. Ms Kantelberg-Abdulla had pressured them and paid them up to DM300 (£120) for their statements.

A week after the story broke, the three main suspects were released without charge. State prosecutors in Dresden reopened their investigation, interviewed 250 witnesses and conducted a third post-mortem.

Last month they closed the case, deciding the findings of the original investigation were correct.

Joseph Kantelberg-Abdulla died of heart trouble while swimming in the Sebnitz pool.

Bild ran a front-page retraction, saying it had "comprehensively researched" its report at the time, but the allegations of Mrs Kantelberg-Abdulla had "proved to be untenable".

THE German press council called the case "a low point for media reporting", and it has since emerged that Mrs KantelbergAbdulla only approached Bild after the news magazine Der Spiegel turned down the story because it could not verify the allegations.

Bild relied entirely on the statements gathered by whatever means necessary by a mother who could not accept the death of her son. Other newspapers based their reports on what Bild reported, but with better research they could easily have avoided the "Sebnitz Case", says Mr Horst Pottker, a media commentator.

"In Germany, as elsewhere, journalists quote other journalists as a matter of habit, a bad habit," he said.

"Of course, researching a story costs money, but a badly researched story has a negative long-term effect on the media that ends up costing it money anyway."

Dr Schroder got a cool reception from the people of Sebnitz when he swept into town on Wednesday, the most difficult stop on his summer tour of eastern Germany.

"Without any ifs or buts, a bitter injustice was done to this city and its citizens because of these sweeping allegations," the Chancellor said. The mayor of Sebnitz, Mr Mike Ruckh, said the media circus that took over his town last November illustrated perfectly the inner division that still existed between the two Germanys.

If a mother in the western German heartlands of the Black Forest had made such a claim, the story would have gone nowhere, he said. "But in eastern Saxony the outrageous was deemed plausible." To believe the German media, he said, extreme-right violence is a problem exclusive to eastern Germany.

Bild has offered to help Sebnitz rebuild its tourism trade, but the damage is already done - to the town's reputation and that of German journalism.

For a few short months last year racist violence, either real or imagined, was front-page news. But now the media have moved on and reports of neo-Nazi attacks are back where they were before, buried inside the newspapers in the briefs.