Most bookmakers suspended their markets on the March 14 feature on Saturday evening after it emerged Kauto Star had returned home lame following his eight-length Ascot Chase romp.
Initial fears were that he had sprained a fetlock, but Nicholls now reports the problem to be a minor infection.
“It’s basically pus in his foot. Once the vet and my head lad had released that he was virtually sound,” said Nicholls.
“We were quite confident last night as we took his shoe off and that instantly relieved him a bit, so we thought that was what the problem was.
“It’s basically a minor setback and shouldn’t affect him too much.
“He would have had a couple of days off after running anyway and this should clear up within 48 hours, so it shouldn’t make too much difference.
“We were fairly confident it was something simple like that but it’s a huge relief,” Nicholls added.
“I don’t think anyone slept here last night and I was almost afraid to go in this morning to find out what was wrong!
“I’m absolutely chuffed though, and it’s all systems go for the Gold Cup now.”
William Hill make Kauto Star their 10-11 market leader while VC Bet go evens about his chances.
The eight-year-old’s stablemate and main market rival Denman is now 6-4 from 7-4 with Hills to take the extended three-and-a-quarter-mile prize.
“It’s a huge relief to wake up this morning and read that all appears to be well with the world,” said Hills’ Kate Miller.
“Although the news appears to be 100% positive, we’ve eased out Kauto slightly as events like this can hugely influence confidence in the market.
“We’ll be keeping a close eye on things, but it will ultimately be up to the punters to decide who they think should start favourite now.”
totesport Cheltenham Gold Cup, William Hill bet: 10-11 Kauto Star, 6-4 Denman, 12-1 Exotic Dancer, 20-1 Kicking King, The Listener, 25-1 Star de Mohaison, 33-1 bar.