(Adds Finmeccanica comment in paragraphs 5-6)
PANAMA CITY, Feb 23 (Reuters) - The Panamanian government said on Tuesday it had agreed the cancellation of a $125 million radar contract with a subsidiary of Italy's Finmeccanica SpA that had become mired in a dispute over alleged corruption.
After flagging suspected bribery and saying the radar equipment did not meet requirements, the government last year sought the approval of Panama's Supreme Court to cancel the contract with Finmeccanica unit Selex. The deal was signed in 2010 under former President Ricardo Martinelli.
President Juan Carlos Varela, who has been locked in a bitter feud with Martinelli since succeeding him in 2014, told a news conference the contract was cancelled by mutual consent and that all legal actions over the case had been halted.
"This agreement represents savings of more than $100 million for the Panamanian state and also resolves other problems caused by the previous administration," said Varela, who fell out with Martinelli after being elected alongside him as vice-president.
Finmeccanica said in a statement on Wednesday the Panamanian government's decision was "not related to the quality of the radar systems supplied by Selex ES, but stemmed from an autonomous reassessment of the overall surveillance system for the country's coastal area".
Under the settlement, Finmeccanica will supply Panama with an AgustaWestland helicopter free of charge, while Panama committed to withdraw the disputes from the Supreme Court and to re-launch business relationships with the Italian defence and aerospace group "in a spirit of renewed trust", it added.
Martinelli, a multimillionaire supermarket tycoon who has been out of Panama since January 2015, has cases pending against him in the isthmus nation for alleged embezzlement, wiretapping and illegal pardons during his 2009-2014 tenure.
He has rejected the allegations.
Panama's Supreme Court in December issued a warrant for the arrest of Martinelli. (Reporting by Elida Moreno; Additional Reporting by Agnieszka Flak; Editing by Kenneth Maxwell and Mark Potter)