The prime minister has thrown a lifeline to children's minister Margaret Hodge amid calls for her resignation.

Tony Blair said Hodge, who has made a public apology to a child abuse victim she described as "extremely disturbed", had an excellent record in office.

The minister, who was set to face a libel action over her remarks, has also agreed to pay Demetrious Panton's legal costs and donate £10,000 to the charity Nacro.

She hopes the deal, agreed between her lawyers and Panton's representatives, will end the dispute which has threatened her ministerial career.

"Mrs Hodge is sorry for the distress caused to Mr Panton in recent days," her solicitor said in a statement.

"She would like to apologise unreservedly for using the words 'is an extremely disturbed person' with reference to him.

"As she said in her letter, she will not repeat these words again. She knows he suffered appalling abuse in the 1970s when he was young and vulnerable from the very people who should have protected and cared for him.

"Anyone in his situation would rightly feel angry and let down after so many years of being disbelieved.

"She has never sought to belittle or invalidate the experience of those who have experienced physical or sexual abuse.

"Over many decades all victims of abuse in children's homes in Islington and elsewhere were betrayed by those in whose care their safety and well-being was entrusted.

"She wishes Mr Panton all the best for the future and she is genuinely sorry for having contributed to his pain and anger."

Speaking in the Commons, Conservative leader Michael Howard questioned her suitability for the job.

"Is it right that someone who tried to bully her way out of trouble should still be minister for children?" he asked.

The prime minister continued to defend the embattled minister.

"I am sorry he has joined in what I regard as a wholly unfair campaign against the minister," he said.

"She has apologised to the particular individual concerned, she was entitled to raise issues given the subject that she was of such criticism.

Blair said Hodge had done an "excellent job in protecting and advancing the interests of children".

"I would have thought it better rather than simply discussing the individual minister, that we discuss the policies of the department," he went on to say.

Despite Blair's defence, Panton said the minister should still resign.

"The last days have not added anything to Mrs Hodge's standing," he said on Monday.

"Young people face a very tough time in our society. They need someone who champions their cause and is respected. They don't need a downgraded minister."