The social networking website announced late on Friday that ad platform Beacon, which Facebook has been gradually phasing out but which is still being used by a small number of websites, will be terminated.
Launched in late 2007, the controversial service displayed actions on Facebook which users took on other websites. It quickly became a PR disaster over concerns Facebook was invading the privacy of its users without their prior consent or knowledge.
The experiment was short-lived, and in December 2007 Facebook founder, Mark Zuckerberg, personally apologised for what he called "lots of mistakes" in the way the system was handled".
Following the backlash, Facebook introduced more controls, making the Beacon service opt-in for members.
As part of the settlement, which is pending approval in the US District Court of the Northern District of California, Facebook will also pay $9.5m to create a foundation to fund products that promote online privacy, safety and security.
The settlement seeks to resolve a class-action lawsuit a number of Facebook users filed against Facebook and some sites that participated in the Beacon service in 2008.
The class-action suit alleged that the service violated users' privacy, and accused Facebook of trying to profit from the data by selling targeted ads against it.
Facebook said in its statement that "we look forward to the creation of the foundation and its work to educate Internet users on how best to control their privacy [and] engage in safe social networking practices."