The retailer launched Pitchers in April this year, but in August Diageo alleged intellectual property right infringement, claiming the drink was a copycat version of Pimm's.
This week Sainsbury's said it would continue to sell Pitchers but would modify the label by adding the Sainsbury's name and changing the colouring from gold to orange.
"This is good news," said John Noble, director of the British Brands Group. "Sainsbury's revising its label suggests it sailed very close to the wind. But consumers must be given a choice without being duped or misled."
A survey by the British Brands Group in May found one in three shoppers had accidentally bought a wrong product because its packaging was similar to that of a well known brand.
Diageo and Sainsbury's said in a joint statement: "The dispute regarding Diageo's Pimm's and Sainsbury's Pitchers has been amicably settled and legal proceedings withdrawn. We look forward to continuing our strong trading relationship."
Hot Topic: 'Changing the label a bit doesn't sound to me like a line has been drawn in the sand'