AFP

London's St Paul's Cathedral and city authorities have suspended legal action against anti-capitalist protesters camped outside the historic landmark.

The management of St Paul's said it unanimously agreed to suspend its current legal action against the demonstrators who have turned the churchyard into a sprawling campsite and triggered turmoil in the cathedral hierarchy.

The head of St Paul's quit on Monday after facing criticism for attempts to move on the protesters, who are inspired by the Occupy Wall Street movement in the United States.

"The resignation of the dean, the Right Reverend Graeme Knowles, has given the opportunity to reassess the situation," the cathedral said in a statement.

It said its decision would "demonstrate that St Paul's intends to engage directly and constructively with the protesters ... without the threat of forcible eviction hanging over both the camp and the church."

The Occupy London Stock Exchange (OLSX) group pitched up in the churchyard two weeks ago. Around 200 multi-coloured tents are spread out by the entrance and the north side of Christopher Wren's masterpiece.

The City of London Corporation local authority was expected to hand a letter to the protesters on Tuesday asking them to remove their tents.

However, Stuart Fraser, the corporation's policy chairman, said it decided to press "pause" on its legal action after St Paul's changed its stance on the matter.

"We've pressed the 'pause' button overnight on legal action affecting the highways, in order to support the cathedral as an important national institution and give time for reflection," Fraser said in a statement.

"We're hoping to use a pause, probably of days not weeks, to work out a measured solution," he added.

The dispute over the protesters has plunged the Anglican church into crisis as it wrings its hands over how to handle the demonstrators while maintaining its principles.

Knowles became the third churchman to quit over the issue in the space of a week, saying his position had become "untenable".

An OLSX spokesman said the protesters were relaxed about any moves to clear the camp.

"We're committed to dialogue and open public debate," 27-year-old freelance writer Ian Chamberlain told AFP.

"We are determined to stay as long as we're useful. Tactics to do so may involve a legal challenge.

"More than nine out of 10 agree with us. The odd one is irritated by our presence here, but the vast majority enjoy our presence here.

"We've got support from a wide cross section of society, including some church leaders.

"We'll stay as long as we can, as long as it's worthwhile is being here."

Overnight Monday, around 50 of the protesters, dressed as zombie bankers, marched into the city to mark Halloween.

They danced to Michael Jackson's 1984 hit Thriller, stopping traffic outside the Bank of England. Police moved them on but they resurrected the dance outside the Royal Bank of Scotland's offices.

Some protesters said they would relish the prospect of legal action.

"A court case would probably highlight the plight even more," said Flo, 35, who declined to give her last name.

"We haven't got anything to lose, it's not like we've got jobs to go to, so going to court is giving us something to do," she said.