US officials have forced Volkswagen to buy back or repair almost 500,000 diesel vehicles after the company admitted using special software to cheat in emissions tests.
Judge Charles Breyer disclosed the deal during a court hearing in San Francisco.
It means Volkswagen will have to pay massive compensation to customers, lawyers and the US government, he warned.
However, Breyer ordered all parties not to discuss final details of the compensation package until they are settled. These will be announced in June.
The agreement covers 482,000 two-liter diesel VWs. It does not include about 90,000 six-cylinder diesel Porsche, Audi and VW vehicles.
VW will also set up an environmental remediation fund to promote green technology.
In what ranks as one of the biggest scandals in corporate history, US regulators discovered last year that VW cars were fitted with software that could distort emissions tests.
About 11 million cars worldwide are thought to be affected.
VW told shareholders last year it had set aside $7.3 billion to deal with potential costs and fines.
But with the German carmaker facing as much as $20 billion in fines for Clean Air Act violations alone, some analysts have estimated that the final bill for the scandal could exceed $30 billion.
