Britain's Charity Commission warned charities today to take "great care" over taking legal action in the wake of the crisis at the Diana, Princess of Wales, memorial Fund.
Describing the decision by the fund to freeze all its grants as a "massive blow", the charities regulator said it showed the "serious consequences" that could arise from courtroom battles.
The Diana fund had lost a legal action against American manufacturer Franklin Mint in a bid to stop it making Diana dolls and other such souvenirs. That court battle left the fund with a £4 million sterling legal bill.
It has now been counter-sued by the US company in a $25 million legal action for malicious prosecution - a suit the charity is blaming for its financial crisis.
Mr Simon Gillespie, the commission's director of operations, said: "This long-running case highlights the serious consequences that may arise from going to court, especially when the legal battle is joined with litigators overseas".
Chief executive of the Diana fund Dr Andrew Purkis said 500 jobs in the organisation and its beneficiaries were now under threat and that existing and future grants to good causes had been frozen.
The organisation has been forced to approach other charities in a bid to keep its own projects afloat.
PA