Duwayne Brooks claimed he was victimised by the Metropolitan Police after he reported the attack on his 18-year-old friend in Eltham, south-east London, in April 1993.
The payment for damages was made after a lengthy legal battle by Mr Brooks, who argued that he was treated as a criminal by the police, and went on to suffer from severe post-traumatic stress disorder.
Scotland Yard said in statement yesterday that Mr Brooks had agreed to drop his legal action against the police as part of the settlement, which includes a written apology.
No one has been convicted of the murder, described by Lord Bingham of Cornhill, the senior law lord, as the "most notorious racist killing which our country has ever known".
Mr Brooks was with Mr Lawrence during the attack and telephoned for an ambulance after his friend was knifed by a gang of white youths at a bus stop. Mr Brooks tried unsuccessfully to sue the police for negligence. He first took action over the way he was treated in April 1999 in civil proceedings. But Judge Butter QC later found in favour of the five officers being sued and the Commissioner.
In March 2002, Mr Brooks won a Court of Appeal battle which gave him the right to sue the Met for wrongful arrest and negligence and 13 individual officers for breaches of the Race Relations Act. Seven months later, the Met was granted leave to appeal to the House of Lords and last year the police finally won that appeal. Lord Bingham and four other law lords agreed the claim in negligence should be struck out - leaving Mr Brooks free to pursue his other claims.Reuse content