The six-year agreement, filed in U.S. District Court in Oklahoma, also requires the Muskogee Public School District to change its dress code to allow exceptions for religious reasons.
"This settlement reaffirms the principle that public schools cannot require students to check their faith at the schoolhouse door," said R. Alexander Acosta, assistant attorney general for civil rights.
The government filed suit in March on behalf of 11-year-old Nashala Hearn. She had been suspended twice by the district for wearing a head scarf, or hijab, to class. School officials said her clothing violated a dress code banning hats and other head coverings.
Hearn and her family said she wore the scarf as part of her observance of Islam. The department's complaint charged with the district with religious discrimination.
The settlement requires the district to put in place a training program for all teachers and administrators about the new dress code and to publicize the change.
A recently passed law in France forbids conspicuous religious symbols and clothing in schools. The law was enacted mainly to defuse controversy about Muslim head scarves but also applies to such things as the Jewish yarmulke and large Christian crosses.
The Justice Department has taken pains after the Sept. 11 attacks to address complaints of discrimination and hate crimes brought by Arab-Americans and other Muslims. Some Muslim groups have been critical of government anti-terrorism efforts as singling them out for harsh treatment and extra scrutiny.