The unusual move is viewed as an attempt to try to save a case stalled after U.S. District Judge Lewis Kaplan ruled that the government violated the constitutional rights of the defendants by pressing the global accounting firm to stop paying legal fees for the indicted employees. It was KPMG's policy to pay legal fees for employees who were indicted.

In papers filed Friday in U.S. District Court in Manhattan, prosecutors urged Kaplan to dismiss indictments against 12 of the 18 defendants scheduled to stand trial in September. They are charged with fraud and tax evasion for allegedly selling and marketing tax shelters to help the wealthy escape $2.5 billion (euro1.86 billion) in U.S. taxes.

If the indictments were dismissed, the government could then file an appeal of Kaplan's ruling, arguing that it had not violated the defendants' constitutional rights. If prosecutors prevailed on appeal, they could then resurrect criminal charges against the 12.

"It's been embarrassing to the government," Stephen Scaring, a prominent white-collar defense attorney, said Monday. "Their decision to dismiss is dramatic," adding that he didn't think the appeals court would be sympathetic to the government's position.

A hearing on the case is scheduled for July 2. Federal prosecutors apparently still intend to pursue their case against the six remaining defendants. A decision on the government's request to dismiss is not expected until this summer.

In his strongly worded ruling last June, Kaplan accused the Justice Department of trying to gain an unfair advantage in white-collar criminal cases by making it tougher for defendants to get a high-priced legal defense team.

Since at least 2003, federal prosecutors have been warning companies under investigation that the government might consider them "uncooperative" if they pay the legal bills of employees charged with wrongdoing.

KPMG avoided criminal prosecution by admitting fraudulent conduct in the design and marketing of certain tax shelters and agreeing to pay a fine of $456 million (euro339 million).