In March, YouTube removed tens of thousands of music videos from its site after it said PRS, which collects British artists royalty fees, were proposing excessive new payment terms when the previous agreement ended in December.
Under the new agreement, YouTube will pay PRS an undisclosed lump sum, instead of the 0.22p per song or 8% turnover wanted by PRS, understood to be in the multi-million pound range, for the rights stream music videos until at least June 2012.
The deal covers music of any form on YouTube, from background music on TV clips, user generated content and professionally shot artist videos.
Patrick Walker, YouTube's director of video partnerships, said: "We are extremely pleased to have reached an agreement with PRS for Music and look forward to the return of premium music videos to YouTube in the UK."
Andrew Shaw, managing director of broadcast and online at PRS for Music, said: "It is important that those who are creating music -- the writers and composers we represent -- are rewarded when their works are used."
As part of the deal, YouTube will allow a number of British musicians to guest-edit the videos that are featured on its front page, including indie band Florence and the Machine and the grime artist Tinchy Stryder, who will select their favourite videos.
The videos are set to return to YouTube today, but will take a full week until all the content is fully restored.
The resolution comes as musicians in the UK, including Sir Paul McCartney, Sir Elton John and Damon Albarn, are crying foul over business secretary Lord Mandelson's proposal to cut off broadband access of internet users suspected of downloading pirated content.
Last month, Mandelson announced a fresh campaign against illegal downloaders in the UK. Mandelson is demanding that internet service providers be given new powers to suspend the accounts of web surfers who persistently download pirated music or films.
A coalition of UK artists, including McCartney and Albarn, released a statement, which read: "We vehemently oppose the proposals being made and suggest that the stick is now in danger of being way out of proportion to the carrot.
"The failure of 30,000 US lawsuits against consumers and the cessation of the pursuit of that policy should be demonstration enough that this is not a policy that any future-minded UK government should pursue."
ISPs are also opposed to Mandelson's proposals. Today it was revealed that business rivals , calling the notion "misconceived", in a letter to the Times.