The Sun, Britain's largest daily newspaper, admitted written allegations that she had an affair with actor Jude Law, had been false. The tabloid agreed to pay her damages and legal costs.
"I am glad that this has finally been resolved," Kidman, 37, said in a press statement.
British-born Law was married to British actress Sadie Frost at the time of the allegations.
Kidman's lawyer Keith Schilling told the court: "The publication of the article caused damage to the claimant's personal and professional reputation and she has suffered considerable embarrassment and distress."
As well as paying fines and damages, The Sun, part of Rupert Murdoch's News International group, vowed never to repeat the allegations.
Kidman is to donate the money made from her legal action to a charity which helps abandoned children in Romania, where part of the film Cold Mountain in which she starred with Law was set. The film is yet to be released in Britain.