It marks an end to the row sparked by Sheffield United's relegation from the Premier League in 2007 and means an independent tribunal to look into the so-called Tevez affair will no longer go ahead on Monday.
"Both clubs are pleased to announce that a satisfactory settlement for compensation has been reached which brings the dispute between Sheffield United and West Ham United to an end," West Ham CEO Scott Duxbury and Sheffield United Chairman Kevin McCabe said in a joint statement on the clubs' websites.
"For everyone concerned, the time was right to draw a line under this whole episode," Duxbury added.
The Argentina international moved on to Manchester United in August 2007 but the dispute between the clubs began when Sheffield United appealed to the Premier League claiming that Tevez, deemed to have had a key role in West Ham's top-flight survival, was ineligible to play for the London club under league rules regarding third-party ownership.
West Ham were fined a record 5.5 million pounds ($7.72 million) by the Premier League in April, 2007 over the transfers of Tevez and compatriot Javier Mascherano but escaped a points deduction which would have effectively sealed their relegation.
Tevez was cleared to play for the rest of the season and scored the winning goal at Manchester United on the final day of the season to complete the club's unlikely escape from the drop.
Sheffield United failed in their bid to be re-instated to the Premier League but subsequently launched an arbitration claim for damages against West Ham who then filed an appeal to the Court of Arbitration for Sport (CAS) in Lausanne.
Sheffield United claimed the CAS had no jurisdiction to hear such an appeal and in November the High Court in London granted a temporary order stopping the appeal, allowing Sheffield United to go ahead with their claim for damages over their relegation.
"We are happy and satisfied with the settlement," said McCabe.
"We are two clubs with a fantastic footballing history who now want to move on and focus on the business of playing football," added McCabe, who has said in the past relegation cost his club at least 50 million pounds.
Neither club disclosed the amount West Ham would be paying Sheffield United in compensation but media reported it to be around 15 million pounds.
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