The lawsuit by former headmistress Nomvuyo Mzamane claimed Winfrey defamed her in remarks made in the wake of the 2007 sex-abuse scandal at the school. The headmistress said she had trouble finding a job after.
A trial had been set to start next week, and Winfrey and several schoolgirls had been expected to testify.
A joint statement released Tuesday by lawyers for both sides said Winfrey and Mzamane met and resolved their differences.
"The two parties met woman to woman without their lawyers and are happy that they could resolve this dispute peacefully to their mutual satisfaction," said the statement, which didn't disclose details of the settlement.
A dorm matron at the Oprah Winfrey Leadership Academy for Girls has been charged with abusing six students. Winfrey has called the allegations crushing given her own stated history of childhood sexual abuse.
The dorm matron, Tiny Virginia Makopo, has pleaded not guilty to 14 charges.
When news of the scandal broke in 2007, Winfrey said she had "lost confidence" in Mzamane and was "cleaning house from top to bottom."
Mzamane claimed she didn't know about any sexual abuse.
Mzamane, born in Lesotho, formerly worked at the private Germantown Friends School in Philadelphia and was living in the city when she filed suit two years ago. She earned $150,000 a year as the head of Winfrey's academy.
Winfrey had planned to defend her remarks about Mzamane on free speech and other grounds, arguing she merely voiced her opinions.
Mzamane's lawyers, who noted Winfrey's huge media reach, contended listeners would think the remarks were based on facts she had gleaned from the school's internal investigation.
Winfrey, as the named defendant, would have had to attend the trial each day. She had rearranged the taping of her Chicago-based daily TV talk show, her lawyers said.
Winfrey, in court papers, said she had planned to hire nurses to serve as dorm matrons for the 150 seventh- and eighth-grade girls who were selected from impoverished backgrounds to attend her school. Mzamane instead hired eight young women from a local company called Party Design, she said.
"These young women were later found to be totally unqualified to handle the position, something Ms. Mzamane had been warned about," Winfrey's lawyers wrote.
As the school's inaugural year unfolded, Makopo attacked another dorm parent, injured three people while driving a golf cart after a champagne party at Mzamane's home and retaliated rather than apologize to girls who complained of mistreatment, while Mzamane did little or nothing, Winfrey's lawyers had alleged in their trial memo.
Forbes last year listed Winfrey's net worth at $2.7 billion. However, for trial purposes, lawyers stipulated the amount at $1.2 billion.
The academy now serves about 330 girls.