Moira Deeming launched an eleventh-hour Supreme Court challenge against Victorian Liberal Party president Brian Loughnane on July 3 after she made an unsubstantiated assault allegation against former leader Matthew Guy.
Mrs Deeming announced late on Wednesday that she had withdrawn the case.
"The injunction has achieved exactly what it intended to achieve," she wrote in a statement posted to social media.
The MP, who sits in the upper house for the Western Metropolitan Region, is facing being disendorsed as a candidate ahead November's state election.
On Wednesday, Mrs Deeming sent a 12-page statement to the party's state executive, providing a mediation proposal that allowed her to end the Supreme Court action.
"The state executive, having all the evidence before them, can now decide whether to pursue medication or reconvene to disendorse me," she said.
"From beginning to end, I progressed the issue in good faith, respected the confidentiality of all involved, submitted myself to the instructions and policies of the party and obeyed the law rather than run it through the media.
"For my part, I will continue doing my work serving Victorians and fighting Labor."
Vision obtained by AAP from a function in May showed Mr Guy placing his hand on Mrs Deeming's upper back as they lean in to talk to one another.
Police reviewed the CCTV and concluded no offence was committed.
Mrs Deeming had accused her colleague of grabbing her "violently" in a headlock, but since claimed she misunderstood the meaning of headlock.
"Having been overseas and unwell when the story broke and jetlagged and unwell when the disendorsement meeting was called, the injunction gave me time to recover, review all the facts, learn the difference between a headlock and a collar-tie grip, and gather my thoughts," she later clarified.
Mr Guy told reporters in June that Mrs Deeming had owed him a public apology, adding he vehemently denied that anything untoward took place.
"Moira Deeming owes me a public apology. I'm owed an apology by the premier and the attorney-general," he said in a statement outside parliament.
"They can come to me the honourable and easy way, or a harder way."
Liberal Leader Jess Wilson would not comment on the future of Mrs Deeming on Wednesday as the matter was "before the courts".
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