The deal substantially reduced the likelihood that prosecutors would continue a five-month criminal investigation into the molestation claims, although the child's lawyer, Larry Feldman, said the boy was still able to testify against the singer.
Announcing what he described as 'a mutual resolution', Mr Feldman said that the 'emotional trauma and strain' of the case had persuaded both parties to 'reflect on the wisdom of continuing with the litigation'.
Both he and Jackson's legal team refused to say how much money was involved in the deal, although it is believed to be more than dollars 10m (pounds 6.7m). Some of this will be paid at once, while part of the money will be deposited in a trust fund for the child, Jordan Chandler, the son of a wealthy Beverly Hills dentist.
The settlement, which follows several days of tense negotiations, was announced outside a courtroom in Santa Monica, Los Angeles, where the lawyers had assembled for the latest hearing in the civil case. Johnnie Cochran, one of Jackson's attorneys, read what was clearly a well-thumbed statement, which said that the deal was 'in no way an admission of guilt by Mr Jackson. He is an innocent man who does not intend his career and his life to be destroyed by rumours and innuendos . . . he intends to move his career forward to even greater heights.'
Under intense questioning about the details of the settlement, Mr Feldman insisted that he was acting in the boy's 'best interest'. He was, he said, 'very happy with the resolution of the matter'.
Although the settlement rids Jackson of a big headache it is likely to be heavily criticised by those who feel that the multi-millionaire superstar has paid off a potential witness in a case that ought to have been resolved by the legal system.
The deal does not bar Jordan Chandler from co-operating with the criminal investigation into Jackson's alleged activities; it is illegal to do so. But if the boy and his family are determined it is in his best interests to drop the issue, California law says he cannot be forced to testify or be punished for refusing to co-operate with prosecutors.
'No prosecutor is going to prosecute if the victim doesn't want to testify,' said Peter Arenella, of the law school at the University of California in Los Angeles. 'Criminal prosecution after a civil settlement would be extremely unlikely.'
The deal also comes at a time when the US judicial system is already under fire from the public. Many have been unimpressed by a jury's inability to reach a verdict in the case of Erik Menendez, 23, who admitted shooting his parents, or the acquittal of Lorena Bobbit, who cut off her husband's penis.
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