As part of the settlement, former assistant Frederic Seaman issued a public apology to Ono, the late Beatle and their son Sean, lawyers for both sides announced.
"I offer no excuses for my conduct and ask only that you can find it in your heart to forgive me," Seaman said in a statement read in court by Ono's attorney.
Ono had sued over the rights to 374 photos Seaman took of Lennon's family, many in the months before he was shot to death by a deranged fan, and closing arguments in the trail had been expected Friday.
The settlement ended the trial and requires Seaman to surrender all rights to the photos. Seaman must also return any Lennon-related items still in his possession within 10 days. He admitted he had exploited the Lennon legacy for personal profit.
"After more than 20 years, it's time to ask for forgiveness for my actions," Seaman said. "I now realize how much pain and embarrassment I have caused."
In her lawsuit, Ono alleged that Seaman violated the agreement by publishing a memoir titled "The Last Days of John Lennon: A Personal Memoir." She also claimed he profited by stealing Lennon mementos and selling them to collectors.
The suit demanded that Seaman surrender the rights to 374 photos he took of the Lennon family, turn over about $75,000 from the sale of the rock icon's papers and pay unspecified damages.
Seaman admitted in court Wednesday that he planned to write a book about his former employer despite signing a confidentiality pact with Lennon and Ono 23 years ago.
During the trial, the Japanese-born artist Ono said she sued Seaman after he supplied videotape of a family picnic to a television show and claimed copyright to family photographs.
Seaman had denied any wrongdoing and said the photos were his.
Jurors were shown the videotape, taken in April 1980, in which Ono is seen frolicking with then 4-year-old son, Sean, at a picnic on Long Island. The lanky, pony-tailed Lennon is seen leaving the picnic table to reposition the camera on a tripod and continue filming.
In 1983, Seaman was charged with having stolen Lennon's diaries. He pleaded guilty to grand larceny and was sentenced to five years probation and ordered to return the diaries.
Seaman began working for Lennon in February 1979. Ono said she fired him in January 1982 when she caught him wearing Lennon's clothes and charging money to her accounts.
In the final day of testimony, Ono laid claim to a touching family photo at the center of the dispute.
The photo of Lennon with their son, Sean, at a Bermuda beach in 1980, showed "that John was a person," Ono told jurors. "He was not just an artist, but a family man and a dad."