Police Minister Nathi Mthethwa has admitted that the arrest of Sunday Times journalist Mzilikazi wa Afrika was wrongful, the newspaper said on Sunday.
"This was a full-frontal assault on the freedom to report on corruption and it is comforting that the minister has acknowledged the arrest was wrongful," Sunday Times editor Ray Hartley said in a statement.
"However, no amount of money can make up for the pain and suffering experienced by Mzilikazi."
The minister agreed to pay Wa Afrika R100 000 in damages and pay the newspaper's legal costs.
Wa Afrika was arrested in Nelspruit, Mpumalanga in 2010, on charges of fraud and defeating the ends of justice.
The arrest came after he co-wrote an article on the R500-million lease agreement for new police headquarters in Pretoria, which former police commissioner Bheki Cele signed.
Earlier this year, Cele was fired by President Jacob Zuma after a board of inquiry, headed by Judge Jake Moloi, found he was not fit to hold office.
Moloi's inquiry was mandated by Zuma to establish whether Cele had acted corruptly, dishonestly, or with an undeclared conflict of interest in relation to two police lease deals.
Hartley said the investigations into the leases upheld the truthfulness of the Sunday Times story.
"No case was ever brought against Wa Afrika in court and the Sunday Times believes that he was the victim of an outrageous act of intimidation by the police," he said.