The deal, confirmed by Dr Haneef in Brisbane on Tuesday afternoon, will end all court action over the matter, including action against former Australian Immigration Minister Kevin Andrews, who cancelled the Indian-born doctor's visa in 2007, Sydney Morning Herald reported.
Rod Hodgson, Dr Haneef's lawyer, said the compensation, agreed to during mediation talks with the Australian government was "substantial" but denied revealing the actual figure, the report added.
Prior to the mediation talks, lawyers had said compensation could be in the order of $1 million (about Rs 4.5 crores).
Dr Haneef told mediapersons on Tuesday afternoon that he was "pleased and relieved".
"I'm happy with the resolution of this matter," he said.
"My wrongful arrest and detention in 2007 was a very traumatic experience and today's settlement was a chance to end this part of my life and move on with my family," he added.
Dr Haneef, who was working at the Gold Coast Hospital at the time of his arrest, was held for 25 days in July 2007 after his mobile phone SIM card was linked to foiled terrorism plots in London and Glasgow.
An inquiry later into Dr Haneef's imprisonment cleared him of any involvement in the 2007 attacks and also suggested the Australian police had made serious errors in its investigation.
Image: Dr Mohammed Haneef
Photograph: Reuters
Haneef to return to Aus for compensation: Report
Haneef to return to Aus for compensation: Report
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