The Home Office is to pay compensation to two former nursery workers wrongly accused of child abuse.

Home Secretary David Blunkett has exonerated Dawn Reed and Christopher Lillie of any criminal charges in a unique action based on their civil libel case this summer.

Ms Reed and Mr Lillie were each awarded £200,000 in libel damages in July after successfully suing the four authors of a report which branded them paedophiles.

The pair were charged in 1993 with abusing children at the Shieldfield Nursery in Newcastle.

At the trial in July 1994, the prosecution conceded that they had no admissible evidence and the judge acquitted them. But by that time Ms Reed had already served 14 weeks in prison and Mr Lillie 10 months on remand.

Nor did it stop the rumours which were compounded in 1998 when Newcastle City Council commissioned an inquiry report, Abuse in Early Years, which made further serious allegations against them.

At the libel hearing, Mr Justice Eady ruled that "the allegations of child abuse against Christopher Lillie and Dawn Reed are untrue".

He added that "they are entitled to be vindicated and recognised as innocent citizens who should be free to exist for what remains of their lives untouched by the stigma of child abuse".

In a joint statement yesterday, the pair said: "We felt completely vindicated by Mr Justice Eady's judgement in July, and we are now delighted that the Home Secretary has recognised our complete innocence."

The Home Secretary's move is part of an ex gratia scheme set up to compensate for miscarriages of justice. The pair's compensation is for wrongful imprisonment and for being wrongfully charged.

Lawrence Kormornick, a public law specialist at Dechert which is handling the Home Office claim, said: "The Shieldfield case is unprecedented. It is the first time that the Home Secretary's finding of complete exoneration is based on the judgement of a civil case."

The final amount of compensation will be determined next year.

Meanwhile the pair are awaiting the result of a joint complaint to the General Medical Council about consultant paediatrician Dr Camille San Lazaro, whose evidence was in the inquiry report.