Baker was prepared to allow the jury to hear previous statements made by Rat and other paparazzi who pursued Diana and her boyfriend, Dodi Fayed, in Paris before their fatal August 1997 car crash.
But on Monday, the Court of Appeal sided with a lower court in ruling that those statements could not be presented without giving attorneys representing various parties the opportunity to question the witnesses.
The inquest jury had heard the transcript of a TV interview with Kenneth Lennox, former picture editor of The Sun tabloid, who said he was telephoned by someone offering pictures of the crash for 300,000 pounds -- then the equivalent of $484,000. Lennox had identified the caller as Rat.
On Tuesday, however, Lennox told the inquest he has accepted that Rat, along with other photographers, was already in police custody at that time of the call.
In an e-mail to Martyn Gregory, author of a book about Diana's last days, Rat denounced Lennox's earlier story as defamatory, according to Britain's Press Association news agency.
The e-mail was not read to the inquest jury.
A French photographer has refused to testify at the inquest into the death of Princess Diana.