LILLE, France (Reuters) - French public prosecutors have shelved an investigation into allegations that disgraced former IMF chief Dominique Strauss-Kahn, a man once tipped to become president of France, had engaged in group rape.

In a statement on Tuesday, the prosecution service said it acted after a young woman retracted an allegation against the 63-year-old, who is also fighting wider accusations of sexual misdemeanor in France and a civil case in the United States.

Strauss-Kahn's legal team welcomed what amounted to a partial victory for their client, who has asked a court to end a wider French inquiry into sex parties organized out of the northern city of Lille in which prostitutes took part.

"We are satisfied but the fight goes on," Richard Malka, a lawyer for Strauss-Kahn, told i>TELE television. "This case is a non-starter and we've said it's total nonsense from the outset. Now we're starting to prove it."

"As for the rest of the case ... the presence of prostitutes at these evenings does not constitute a pimping offence," said Henri Leclerc, another Strauss-Kahn lawyer.

Strauss-Kahn was days away from announcing he would run for the French presidency in May 2011 when police arrested him in New York after a hotel maid alleged he had tried to rape her.

New York prosecutors later dropped those charges, citing concerns about the credibility of the accuser. But hotel maid Nafissatou Diallo is pursuing him in a civil case and his legal battles have piled up since his return to France.

In the so-called Carlton Affair, named after a luxury hotel in the northern French city of Lille, investigators are trying to establish whether Strauss-Kahn participated in sex parties to a degree that amounted to actively encouraging prostitution.

Strauss-Kahn's defense team has argued from the outset that he is the victim of a witch-hunt because of his self-confessed penchant for libertine sexual encounters. In France, having sex with prostitutes is not illegal, but pimping is.

The public prosecution service said that the woman behind the group rape allegation had never filed a formal complaint and had later said she was in fact a consenting participant in the incident in question.

A court is due to rule on November 28 on a request that the entire French inquiry into Strauss-Kahn be dropped.

Strauss-Kahn is trying to make a comeback as an economic adviser and conference speaker. His wealthy art heiress wife Anne Sinclair, a former star TV journalist, has rekindled her own career as editor of a popular news and commentary website.

A source close to Strauss-Kahn said in June that he and Sinclair had separated.

(Additional reporting and writing by Brian Love in Paris; Editing by Andrew Osborn)