Sagan was ejected from the Tour for elbowing Mark Cavendish (Dimension Data) during the sprint finish closing out the fourth stage in Vittel.
His Bora-hansgrohe team immediately appealed the decision, but the Court of Arbitration for Sport (CAS) denied the request for a temporary suspension to allow Sagan to complete the Tour and aim for a sixth Green Jersey title.
CAS was scheduled to rule on the dispute later that day but was pre-empted by the decision of the two parties.
"Having considered the materials submitted in the CAS proceedings, including video footage that was not available at the time when the race jury had disqualified Peter Sagan, the parties agreed that the crash was an unfortunate and unintentional race incident and that the UCI Commissaires made their decision based on their best judgment in the circumstances," the UCI said in a statement.
"On this basis, the parties agreed not to continue with the legal proceedings and to focus on the positive steps that can be taken in the future instead."
It appears the incident will result in some change, with UCI President David Lappartient flagging a "video referee" to assist race commissaires in decision making.
“These proceedings have shown how important and arduous the work of the UCI Commissaires is," he said. "As of next season, the UCI intends to engage a ‘Support Commissaire’ to assist the Commissaires Panel with special video expertise on the main events of the UCI World Tour.”
Sagan said he was pleased with the decision, adding that the "past is already forgotten."
"It's all about improving our sport in the future," he said. "I welcome the fact that what happened to me in Vittel has shown that the UCI Commissaires's work is a difficult one and that the UCI has recognized the need to facilitate their work in a more effective way.
"I am happy that my case will lead to positive developments because it is important for our sport to make fair and comprehensible decisions, even if emotions are sometimes heated up."
While Sagan and the UCI may be happy, Cavendish's Dimension Data team appears less so and is asking the UCI for further clarification while stressing "Cavendish played no part in the cause of the season-ending crash".
“As riders and teams, we want all parties to work together to make racing safe and enjoyable," team principal Douglas Ryder said in a statement. "We understood this dispute was over the process that prevented Bora-Hansgrohe from stating their case to the race jury.
"However, following today’s announcement it seems the investigation also included reviewing the actual race incident. Given that we are the team with the rider who ultimately suffered the most as a result of this incident, we were surprised to not be included to offer our insights to the investigation.”