Diddy and Diageo Squash Beef, Settle 'Racist' Alcohol Lawsuit

Diddy and alcohol giant Diageo were ensnarled in a nasty legal battle last year -- but that's old news now ... 'cause TMZ can confirm both parties have buried the hatchet.

Both Diddy and Diageo tell TMZ simultaneously ... "Sean Combs and Diageo have now agreed to resolve all disputes between them. Mr. Combs has withdrawn all of his allegations about Diageo and will voluntarily dismiss his lawsuits against Diageo with prejudice."

The statement continues ... Diageo and Mr. Combs have no ongoing business relationship, either with respect to Cîroc vodka or DeLeón tequila, which Diageo now solely owns."

The Bad Boy music mogul sued the company last year -- accusing them of racism for allegedly neglecting his tequila line, DeLeón Tequila. Diddy claimed Diageo put this booze on the backburner, and alleged there were racist intentions behind it.

Diageo, of course, denied that ... and said they'd tried dealing with this behind closed doors -- but once Diddy opened the legal floodgates, they were ready to defend themselves.

This case has been playing out quietly behind the scenes, but now ... it's suddenly over. Diddy's withdrawing his lawsuit against Diageo -- and while there's no mention of it explicitly ... this certainly smells like a settlement of some sort.