GM and Volkswagen said in a joint statement that VW also agreed to buy at least $1bn worth of parts from GM over seven years in exchange for the lawsuit being dismissed.
The agreement ends a long-running dispute between the two car makers. The central figure in the case, Jose Ignacio Lopez, still faces criminal charges in Germany and the entire matter also remains under investigation by the US Justice Department.
An exchange of letters between VW chairman Ferdinand Piech, GM chairman John F Smith Jr. and board members expressing regret for some statements made during the dispute came as part of the deal.
"The agreement looks toward the resumption of normal business and competitive relationships between the companies," the statement from the two car makers said.
The dispute began when Mr Lopez, about to be promoted to GM's chief of North American operations, moved overnight to Volkswagen, Europe's biggest car maker.
Mr Lopez, a Spaniard who was GM's European purchasing chief, is accused of stealing thousands of pages of documents and computer diskettes when he left for VW in March 1993 along with seven other GM executives. He has been given much of the credit for VW's recent turnaround.
Talk of a settlement had been in the air since last month, when German prosecutors indicted Mr Lopez and three other ex-GM managers who defected to VW with him on charges of stealing GM secrets.