The two journalists and a family member sued the Sunnyvale, California-based company earlier this year after Yahoo HK, Yahoo's wholly owned subsidiary based in Hong Kong, gave Chinese authorities e-mails containing pro-democracy literature. The jailed journalists alleged in the lawsuit that jailers have tortured them and that Yahoo was responsible.
The company has denied any responsibility and maintained it was complying with Chinese law when it turned over the e-mails.
The case has raised questions about whether Internet companies should cooperate with governments that deny freedom of speech and frequently crack down on journalists. It also has been the subject of congressional hearings, where lawmakers accused the company of collaborating with an oppressive communist regime.
Neither side disclosed terms of the settlement other than to agree that Yahoo would pay the attorneys fees of the two journalists and the family member who sued. The three were represented by The World Organization for Human Rights in Washington D.C.
Shi Tao, a former writer for the financial publication Contemporary Business News, was jailed under state secrecy laws for allegedly providing state secrets to foreigners.
According to the suit, the other journalist, Wang Xiaoning, was arrested in 2002 after Yahoo HK gave police information linking him to his anonymous e-mails and other political writings he posted online.
Yahoo Chief Executive Jerry Yang and General Counsel Michael Callahan offered apologies to Shi's mother at a congressional hearing last week.
Yang and Callahan turned around from the witness table and bowed from their seats to the woman, Gao Qinsheng, who bowed in return and then began to weep.
After the hearing, the Yahoo officials met with Gao Qinsheng for the first time to hear her concerns.
Callahan was summoned before the House Foreign Affairs Committee last week to explain testimony he gave Congress last year. He said then that Yahoo had no information about the nature of China's investigation when the company handed over information that ended up being used to convict Shi.
Callahan subsequently has acknowledged that Yahoo officials had received a subpoena-like document that made reference to suspected "illegal provision of state secrets" - a common charge against political dissidents.
He reiterated last week that he regretted his failure to inform the committee of this new information once he learned of it months after his congressional testimony.
But Callahan continued to insist that Yahoo did not know the real nature of the Chinese investigation because the order was not specific.