Toyota did not accept any blame but agreed to compensate owners who argued that the value of about 16.3-million vehicles took a hit from dozens of deadly accidents allegedly caused by Toyota vehicles speeding out of control in 2009.
The deal will cover the cost of installing a free brake override system in about 2.7-million vehicles.
It will also provide cash payments to those who sold their vehicles in the wake of the recalls or who own vehicles ineligible for the override system.
Toyota shares closed 2.61% higher at 3 930 yen in Tokyo on Thursday, outpacing broader gains in the Japanese market as investors reacted to the settlement which was announced in the US on Wednesday.
The huge payout will "sting" Toyota, but it will also allow the Japanese giant to "leave these troubles behind and move forward in the new year", said Michelle Krebs, an analyst with automotive site Edmunds.com.
Once lauded for its safety standards, Toyota has been forced into damage control mode in recent years after recalling millions of vehicles due to a series of serious defects.
The firm's biggest domestic rivals, Nissan and Honda, have also issued huge recalls over their own safety and quality problems.
Earlier this year Toyota added two models to the 2009/10 recalls launched after it was discovered that floor mats were trapping the accelerator pedal.
Toyota's mishandling of the initial problem and other reports of sudden, unintended acceleration led to a US congressional probe, more than $50 million in fines from US regulators and public apologies by its chief.
Earlier this month, the company agreed to pay a record $17.35-million fine for failing to promptly notify US authorities that the floor mats could also be trapped under the accelerators of 2010 Lexus models.
And in November Toyota agreed to pay $25.5-million to settle claims from shareholders who lost money after the automaker's stock price plummeted in the wake of the recalls.
Toyota has worked hard to regain its reputation for safety, while at the same time fighting off the impact of the economic crisis, a strong yen and the devastating 2011 quake-tsunami disaster.
The settlement helps Toyota avoid a lengthy and risky court battle with angry owners who also argued that its technology – not the trapped floor mats – was behind the deadly instances of sudden, unintended acceleration.
"This was a difficult decision – especially since reliable scientific evidence and multiple independent evaluations have confirmed the safety of Toyota's electronic throttle control systems," Christopher Reynolds, Toyota Motor North America's chief legal officer, said in a statement.
"However, we concluded that turning the page on this legacy legal issue through the positive steps we are taking is in the best interests of the company, our employees, our dealers and, most of all, our customers."
On Wednesday, Toyota forecast a 22% jump in worldwide sales this year to 9.7-million units, driven by surging demand that may help it retake the top spot in the global auto market.
The figures could put Toyota ahead of General Motors and Volkswagen as the world's biggest automaker, a title it held between 2008 and 2010 but lost last year after a slump in sales and production largely tied to Japan's quake-tsunami disaster.
'As if nothing ever happened'
Japan's biggest automaker – which has forecast a net profit of 780-billion yen ($9.1-billion) in the fiscal year to March – also said it expects to sell about 9.91-million vehicles in 2013, up 2% year-on-year.
"Toyota's outstanding performance this year is proof that consumer sentiment for the company's products has already recovered to a degree as if nothing ever happened," said Jesse Toprak, an analyst with automotive site TrueCar.com.The settlement, which was filed in a California federal court Wednesday, must still be approved by a judge.
It includes $250-million for owners who have sold their vehicles, $250-million for owners whose vehicles are ineligible for the brake override system and $30-million for safety research.
Toyota will also provide free repairs for certain components linked to the recall, and said it would take a $1.1-billion charge to cover the estimated costs of the settlement and two other cases. – AFP
A lead attorney for the plaintiffs told the Wall Street Journal that Wednesday's deal could end up costing Toyota as much as $1.4-billion.