Millions of music fans worldwide have used the Australian website of Kazaa to download pirated music for free since 2002.
Lawyers for the 30 record companies seeking damages in Australia have been locked in a Federal Court battle with Kazaa since 2004.
In a landmark decision in 2005, Nikki Hemming, whose company Sharman Networks developed and distributed Kazaa, was found guilty of encouraging users to infringe copyright.
Kazaa has now agreed a settlement with representatives of the 30 record companies - including Universal, Festival/Mushroom, EMI, Sony BMG and Warner Music Australia.
Music Industry Piracy Investigations (MIPI) director Stephen Peach said: "The financial part of the global settlement that Kazaa has agreed to pay the recording industry is $US115 million ($A151 million)".
Kazaa to become legal
Under the terms of the settlement, Kazaa will convert to a legal business model with licensing arrangements to be negotiated with record labels.
It will also introduce filtering technologies to ensure that users can no longer distribute copyrighted music, film or software files.
The settlement ends litigation in the United States and Australia, and promises to crack down on what industry officials said was one of the world's biggest illegal "peer to peer" (P2P) file-sharing operations.
Kazaa’s chief executive, Nikki Hemming, said the settlement "marks the dawn of a new age of cooperation between P2P technology and content industries."
"All the parties involved now recognize the time is right to work together, and we are looking forward to collaborating with the music and motion picture companies to make P2P an integral part of the future of online digital entertainment."
Kazaa, which had an estimated 4.2 million users at its peak in 2003, was accused by the music industry and major Hollywood studios of being a major source of illegal copies of works distributed over the Internet.
The deal comes a year after the US Supreme Court ruled that Grokster and other P2P sites may be held liable for copyright infringement if they encourage people to make unauthorized copies of songs, films or other content. This opened the door for the music industry to pursue damages.
Industry officials said the move marks a major step in moving consumers away from illegal music-swapping to legal purchases of online content though sites like Apple's iTunes and the reborn.
"This is welcome news for the music community and the legal online music marketplace," said Recording Industry Association of America chairman Mitch Bainwol.
"Steadily but surely, we are passing another important marker on the remarkable journey that is the continuing transformation and development of the digital marketplace.
"The winners are fans, artists and labels and everyone else involved in making music, and our partners in the technology community."