Australia's online watchdog on Wednesday dropped a legal effort to force Elon Musk's X to remove posts depicting the violent stabbing of a Sydney priest.

"I have decided to discontinue the proceedings in the Federal Court against X Corp," eSafety Commissioner Julie Inman Grant said in a statement.

The watchdog had ordered Musk's company to globally remove about 65 video and audio clips of the April 15 non-fatal attack against an Assyrian bishop.

But X challenged the commission's right to make a global takedown order, arguing that geoblocking users in Australia was enough.

The watchdog had argued X's measures were easily dodged with the use of popular location-masking services like VPN.

Inman Grant said she stood by the decision to take legal action: "I stand by my investigators and the decisions eSafety made".

"Our sole goal and focus in issuing our removal notice was to prevent this extremely violent footage from going viral, potentially inciting further violence and inflicting more harm on the Australian community," she said.

The disputed posts showed Assyrian orthodox Bishop Mar Mari Emmanuel being stabbed about six times during a livestreamed sermon.

A 16-year-old has been charged with "committing a terrorist act" in relation to the attack, which is said to have been religiously motivated.

The eSafety Commissioner said she now "welcomed the opportunity" for a merits-based review of her decision by the country's Administrative Appeals Tribunal.

Her decision to drop the case followed a setback last month when the Federal Court refused to extend the order for a global ban while the court case was being fought.