Dublin, Ireland - The EU is to drop a case aimed at forcing Irish religious schools to employ teachers who don't believe in the religious "ethos" of the school and may even hold anti-religious beliefs.
In a significant change of policy, EU Commission President Barosso said it will now not be pursuing a case against Ireland's alleged breach of EU rules on equal opportunity.
In a highly controversial move, EU Equal Opportunities Commissioner Vladimir Spidla issued a "reasoned opinion", warning that exemptions for religious organisations from equality rules under Irish law are in conflict with EU rules.
As EU law takes precedence over Irish law, the move was widely seen as a prelude to court action and hefty fines.
According to the exemption in Irish law, Church-run schools, hospitals and charities can choose not to employ people who contradict their ethos. So a Catholic school has the right not to employ an atheist teacher.
The exemption was negotiated a number of years ago and upheld by the EU's council of ministers. But last February the European Commission decided that the exemptions granted to such bodies were "too broad" and told the government to comply with the EU's stricter equality directive or face a multimillion euro fine.
But now EU Commission President has said the EU will not pursue the matter.
"There is no intention to bring Ireland to court on that ground. That's not going to happen," said Mr Barosso.
The Iona Institute, a Catholic pressure group, had described the commission's threat as a "huge blow to the concept of religious freedom".
Minister for European Affairs Dick Roche strongly welcomed the news. "Mr Barosso's comments are very positive. I look forward to seeing the final adjudication by the commission," he said
The climbdown reflects intense pressure on the EU to avoid antagonising the Irish in advance of crucial referendum on the Lisbon Treaty.