The South African had been suing for his job back or up to Aus$4 million (US$3.7 million), claiming there was a deliberate campaign against him and he had no choice but to take legal action.
After conciliation talks lasting more than 13 hours at the Fair Work Commission in Sydney, the two parties reached a “confidential agreement”, the Australian Associated Press reported.
Arthur was ousted two weeks before the start of the Ashes series in England, with two years left on his contract, and was replaced by Darren Lehmann.
“I am very happy with the financial settlement we have reached tonight with Cricket Australia,” he said in a statement.
“For me, this was never solely about the money. I just wanted to be treated fairly, and with dignity and respect.
“I have significantly reduced my claim, as it is being settled tonight and not dragging on at significant cost,” Arthur said, adding he also wanted to protect Australia’s cricket team from any further publicity surrounding the dispute.
Details of Arthur’s case which were leaked to the media revealed divisions in the team.
Skipper Michael Clarke allegedly described his then-vice-captain Shane Watson and his faction in the side as “a cancer”, and Arthur termed himself the “meat in the sandwich” between the two camps.
Arthur had also alleged discrimination on grounds of nationality.
He was sacked after Australia lost a Test series in India 4-0 and followed it up with a poor showing at the Champions Trophy in England. The tournament was marred by the off-field misconduct of batsman David Warner.
Under Lehmann Australia lost the first two Ashes Tests, with former skipper Allan Border lamenting the top-order batsmen as “embarrassing”.
They must win or draw the third Test starting Thursday to keep the five-game series alive.