The US Department of Justice, Environmental Protection Agency and the California attorney general's office said Daimler violated environmental laws by using so-called "defeat device software" to circumvent emissions testing.
The companies sold roughly 250,000 cars and vans between 2009 and 2016 with diesel engines that didn't meet state and federal standards. The settlement, which includes civil penalties and still awaits court approval in Washington, will require Daimler to fix the already sold vehicles.
Daimler AG must repair at least 85 percent of the affected cars within two years and at least 85 percent of the affected vans within three years, justice department officials said.
The company must also offer extended warranties to drivers on certain vehicle parts and conduct emissions tests on the repaired vehicles each year for the next five years. A separate class action civil settlement will bring a one-off charge of about $700 million, Daimler AG said.
In a statement, the company also said settling the emissions allegations means Daimler does not admit any liability nor will the company have to buy back any of the vehicles in question. As part of Daimler AG's settlement, officials in California will receive $17.5 million for future environmental enforcement.