The agreement with Pfizer was divided into several parts.
Tony West, the assistant attorney general at the US justice department, said Pfizer had asked the Food and Drug Administration if it could promote the sale of Bextra, an anti-inflammatory drug, for certain other uses and in doses higher than the approved maximum.
"The FDA, citing safety concerns, said 'no'. But Pfizer marketed Bextra for those unapproved uses anyway," he said.
"When off-label marketing like this occurs, patients' health and lives are put at risk, and those who cause that risk must be held accountable."
Use of drugs for so-called "off-label" medical conditions is not uncommon, but drug manufacturers are prohibited from marketing drugs for uses that have not been approved.
The justice department had alleged that Pfizer's inappropriate marketing "caused false claims to be submitted to government health care programmes for uses that were not medically accepted indications and therefore not covered by those programmes."
Under terms of the settlement, Pfizer must pay $1bn to compensate Medicaid, Medicare and other federal health care programmes.
Kathleen Sebelius, the US health secretary, welcomed the settlement.
"This historic settlement will return nearly one billion dollars to Medicare, Medicaid, and other government insurance programmes, securing their future for the Americans who depend on these programmes," she said in a statement.
Amy Schulman, the senior vice president and general counsel of Pfizer, said: "We regret certain actions taken in the past, but are proud of the action we've taken to strengthen our internal controls."
Authorities called Pfizer a repeat offender, noting it was the fourth such settlement of government charges in the last decade.
In 2004, Pfizer pleaded guilty to charges of improper sales tactics and its marketing practices have been under federal supervision since.