The company dropped its action against George Hotz, also known as Geohot, and secured an injunction that bans him from similar behaviour in future.
Sony claimed that George Hotz had violated its intellectual property
Mr Hotz, who is 21 years old, had been facing charges of copyright infringement and fraud.
In a statement, Sony welcomed the settlement and said that it would help to protect its intellectual property.
Around 100 other individuals, named and un-named, were also facing legal action. The fate of their cases is currently unclear.
Sony began pursuing Mr Hotz after he published information on his website that enabled users to install a reprogrammed version of the PlayStation's operating system.
The company claimed that by circumventing its security, PS3 owners would be able to play "homebrew" or copied games.
Proceedings in the California courts appeared to have reached a relatively advanced stage.
Lawyers for the Japanese firm had obtained permission to access details of users who downloaded Geohot's crack.
Following the settlement, the two sides issued a joint statement.
Mr Hotz said: "It was never my intention to cause users trouble or to make piracy easier. I am happy to have the litigation behind me."
Sony's general counsel in the USA, Riley Russell commented: "We appreciate Mr Hotz's willingness to address the legal issues involved in this case and... to quickly bring this matter to an early resolution."
Although no further details of the settlement have been revealed, Mr Hotz has not remained entirely tight-lipped regarding his feelings toward Sony.
In a blog posting on 11 April - the same day as the case was concluded - he wrote: "I am joining the Sony boycott. I will never purchase another Sony product.
"I encourage you to do the same. And if you bought something Sony recently, return it."
Sony stressed that the decision to settle had nothing to do with recent attacks on its website, attributed to the hacker collective Anonymous.