Airbnb Inc and New York City said on Friday they had resolved a lawsuit brought by the company challenging a law it argued could expose it to significant penalties for advertising short-term apartment rentals.

Airbnb filed the suit in October after New York state enacted a law imposing fines of up to US$7,500 on hosts who advertise illegal short-term rentals on platforms like Airbnb.

Airbnb had contended that the law's ambiguous wording could allow New York authorities to apply it to online platforms like itself that host third-party listings, creating the risk of significant civil penalties and criminal liability.

Under the terms of the settlement, New York City agreed that the law would not be enforced against the company and was instead aimed at individual violators, a spokeswoman for Mayor Bill de Blasio said.

"The city will enforce this and other existing laws against bad actors, and appreciates the additional enforcement powers this new tool provides to protect New Yorkers and visitors from unsafe conditions," said Melissa Grace, a mayoral spokeswoman.

San Francisco-based Airbnb in a statement said it saw this agreement as a step forward for its hosts, with both sides agreeing to work cooperatively on ways to address New York City's housing shortage.

"We look forward to using this as a basis to finding an approach that protects responsible New Yorkers while cracking down on illegal hotels that remove permanent housing off the market or create unsafe spaces," Airbnb said.

The deal follows an earlier settlement with the New York state attorney general, who agreed his office would refrain from taking any action to enforce the law, citing an express provision stating enforcement would be carried out by the city.

The lawsuit came amid ongoing clashes between the online lodging service and public officials seeking to minimize the impact of short-term rentals on neighborhoods and urban housing markets.

Airbnb argues it cannot legally be held responsible for how landlords use its platform. If it is required to enforce local laws on short-term rentals, that could drastically reduce listings in some of its biggest markets.