Munde, who had thrown his hat in the ring for MCA president's post, has challenged the rejection of his nomination in the election.
Pawar had earlier sought transfer of case to another court.
"Pawar's lawyer told the court that they want to withdraw the application with liberty to approach the Bombay High Court," said Munde's lawyer, advocate Vivekanand Gupta.
The city civil court allowed the withdrawal.
Pawar's transfer application had said that the suit was based upon the interpretation of rules of MCA and the judge had dealt "exhaustively" with them at an earlier stage, but the main hearing too would depend on interpretation of same rules, so "it is desirable that the suit be assigned to any other court for final disposal".
The court, on November 26, had temporarily restrained Pawar from functioning as MCA chief, but Bombay High Court overturned the ruling.