The family of Solomon Linda, who composed the original Zulu tune for the song, was claiming 10 million rand (about $1.6 million) in damages from the entertainment giant.
Linda, who died with less than $25 in his bank account in 1962, was a Zulu migrant worker who composed the song Mbube (lion) in Johannesburg in 1939 and recorded it with a singing group called the Evening Birds.
South African lawyer Owen Dean said on Thursday the settlement was reached with New Jersey-based Abilene Music, which holds the copyright to The Lion Sleeps Tonight which in turn licensed it to the Walt Disney Corporation.
"All of the parties to the litigation plus Abilene are part of the settlement and in terms of it all, the litigation will be withdrawn," Dean said.
"The settlement involves a payment of back royalties to the family and the right to participate in the royalties in the future and that's on a worldwide basis," he added.
The lawyer declined to disclose the amount paid by Abilene Music, simply stating: "We are satisfied with it."
The settlement ends a long-running dispute between companies including Disney over the rights to the song and relatives including Solomon's three daughters who live in poverty in the Johannesburg township of Soweto.
The song has been recorded by more than 150 different artists and features in at least 15 movies and stage musicals. It has been translated into several languages including French, Japanese, Danish and Spanish.
"When I saw the Lion King on television I was mad. It reminded me that they were using the song without our permission and stealing our money"
Daughter of Solomon Linda
Although many productions have used the hit song, Disney has been identified as the "most active user" of the song, including in the 1994 blockbuster film The Lion King and spinoff musicals.
"When I saw the Lion King on television I was mad," daughter Elizabeth Gugu told AFP in her home in a rundown area of Soweto back in July 2004.
"It reminded me that they were using the song without our permission and stealing our money," she said.
Dean said one of the settlement's most important victories were that Linda in future will be acknowledged as a co-composer of The Lion Sleeps Tonight.
Folk singer Pete Seeger came across the song in New York in 1949, transcribed it "note for note" and called it "Wimoweh", from the Zulu "uyiMbube", which means "He is a lion".
The composer's children live in
poverty in Soweto
In 1961, the Tokens recorded the song and added the English lyrics starting with "In the jungle, the mighty jungle".
The case was brought under an obscure piece of 1911 copyright legislation which gives artists' families the rights to their works 25 years after their deaths and entitle relatives to renegotiate deals and secure better royalty terms.
"We have set the precedent for other people who were perhaps not given proper recompense for their artistic creations," said Dean.
Disney in September 2004 lost a bid to set aside the lawsuit by the Zulu family and the case was to resume in a South African court next week.