The firm also pleaded guilty to a single criminal charge, the company and the US Justice Department said.
Takata will pay a $25m fine, $125m to people injured by the airbags and $850m to carmakers that used them.
The faulty airbags have been linked to at least a dozen deaths and more than 100 injuries worldwide.
Most major carmakers have been affected by the fault, with about 100 million Takata airbags recalled globally.
The company's chief executive, Shigehisa Takada, said: "Takata deeply regrets the circumstances that have led to this situation and remains fully committed to being part of the solution."
Takata has previously acknowledged some of its airbag inflators expanded with too much force and sprayed metal shrapnel into cars.
"For more than a decade, Takata repeatedly and systematically falsified critical test data related to the safety of its products, putting profits and production schedules ahead of safety," said Andrew Weissmann, head of the Justice Department's fraud section.
"I offer my deepest sympathies to the families and friends of those who died and to those who were injured as a result of the Takata Corporation's failure to fulfil its obligation to ensure the safety of its airbag systems," said Calvin L Scovel, inspector general of the US Department of Transportation.
Three former Takata executives were also charged by the US authorities on Friday for their part in the scandal.
The charges for conspiracy and wire fraud were filed against Shinichi Tanaka, Hideo Nakajima and Tsuneo Chikaraishi.
All three were long-serving executives at Takata until 2015.
Arrest warrants have also been issued for the three executives, although a spokeswoman for the US Attorney's Office in Detroit said it was unclear where the defendants were. They do not have a date to appear in court.
Earlier on Friday Takata shares closed almost 17% higher in Tokyo on reports of the settlement with US regulators.
It has not disclosed the total cost of the global recall, but reports have suggested it is working on a restructuring deal and potential bankruptcy protection.
Japanese car parts maker Takata has agreed to pay $1bn (£820m) in penalties in the US for concealing dangerous defects in its exploding airbags.