SYDNEY (AFP) - Australia's consumer watchdog on Thursday agreed to drop legal action against two Google subsidiaries, but vowed to pursue the Internet giant's parent company for allegedly misleading web users.

The Australian Competition and Consumer Commission (ACCC) launched legal action last month alleging Google Inc, Google Australia and Google Ireland and the magazine Trading Post misled web users by misidentifying sponsored links.

The regulator agreed in the Federal Court in Sydney Thursday to drop Google's Irish and Australian subsiduaries from the action.

"The ACCC case against Trading Post and Google Inc continues," it said in a statement.

In what it says is a world-first action, the ACCC alleges Google failed to distinguish between paid advertisements and "organic" results generated by the search engine.

It said in court last month that Google was misleading people who thought the ranking of its search results was not influenced by payments from advertisers.

The regulator has also accused Google of misleading conduct over sponsored hyperlinks embedded in its results site.

Google has denied any wrongdoing.

The case will return to court on November 16.