But a leading advocacy group warned that any returned money likely will be stolen again and called the government move "a celebration of corruption."
With the charges dropped, supporters of Mohammed Abacha, son of the late dictator Gen. Sani Abacha, said that paves the way for him to run for governor of northern Kano state on the ticket of the ruling People's Democratic Party of President Goodluck Jonathan.
Neither Abacha nor party officials could immediately be reached for comment and Abacha's supporters insisted on anonymity because they were not authorized to speak to reporters.
Mohammed Abacha is wanted in the United States for his alleged part in laundering some $458 million in funds stolen by his father and frozen by the U.S. in February.
Human rights activists have accused Jonathan and his government of consistently rewarding instead of punishing those accused of corruption. Nigeria, Africa's most populous nation, is a country where graft colors every facet of life and keeps the majority in abject poverty.
A statement from Nigeria's Ministry of Finance on Thursday said it has taken the government 16 years to win the agreement to return the money banked in Liechtenstein, most recently held up by a lawsuit filed by Abacha family companies with the European Court of Human Rights.
The Abachas agreed to drop the suit in return for the government dropping charges against Mohammed Abacha, the statement said. It said spending of the money would be overseen by a government committee and the World Bank.
The World Bank also had oversight on the spending of $505 million in Abacha loot returned by Switzerland to Nigeria's previous administration, in which Jonathan was vice president. Swiss and Nigerian advocacy groups say $250 million of that money cannot be accounted for.
"Such funds should not be released directly to the government, especially in the light of the withdrawal of the suit against Abacha's son," Adetokunbo Mumuni of the Socio-Economic Rights and Accountability Project told The Associated Press.
He said his group will continue to press the U.S. attorney general to return any frozen funds to Nigerian charities or U.S. charities working in Nigeria to ensure it is not again looted.
Abacha seized power in a coup in 1993 and died in suspicious circumstances in 1998 while he was still in office. He is believed to have stolen up to $5 billion. Other reported seizures of his suspected loot include $630 million in Luxembourg and $450 million in Britain