Outsourcing group Serco has abandoned plans to pass on the impact of government spending cuts to suppliers.
Serco, which carries out a host of government contracts, had asked its largest suppliers to pay a 2.5% rebate.
The company said it now wished to "apologise unreservedly" to its suppliers, and had retracted letters asking for the rebate.
The government is reported to have been angered by Serco seeking rebates from its suppliers, but has yet to comment.
Serco operates a number of public sector contracts on behalf of the government and local authorities.
These include running four prisons including Doncaster, the maintenance of a number of RAF bases including Brize Norton, and the operation of London's Docklands Light Railway.
Shares in the firm were down 4.6% in afternoon trading on the London Stock Exchange, making it the biggest faller on the FTSE 100 index.
Serco said in its statement that it had been working with the Cabinet Office as part of the government's efficiency programme, which "has involved discussions with our leading suppliers".
It added: "As a result our plans evolved and we decided not to seek or accept any contributions from our suppliers, who had recently received letters asking for rebates.
"As a company that values our relationships with all our supply chain partners, large and small, we deeply regret this action and apologise unreservedly to them for the concern that this has caused."
A number of Serco's suppliers had complained about the plans for rebate payments.
In its letter to suppliers, Serco had appeared to suggest that future contracts were at stake.
Its finance director Andrew Jenner wrote: "I am asking you to offer us a rebate of 2.5% (exclusive of VAT) on Serco's full-year spend with you for the 2010 calendar year in the form of a credit note.
"Like the government, we are looking to determine who our real partners are that we can rely upon.
"Your response will no doubt indicate your commitment to our partnership, but will also be something I will seriously consider in our working relationship as Serco continues to grow."