Villa will pay Norwich the original amount agreed in Lambert's contract with the Norfolk club who will pay the former Scotland midfielder his bonus due after the 2011/12 season.
"This represents a final settlement of all claims and disputes between the parties," Norwich added in a short statement on their website (www.canaries.co.uk).
The settlement follows a bitter dispute between the parties in which Lambert and Norwich said they were suing each other following his Carrow Road exit at the end of last season.
Norwich chairman Alan Bowkett told a fans' forum in October that Lambert was seeking 2 million pounds ($3.24 million) in compensation for breach of contract and unfair dismissal.
Lambert, who said he was "extremely disappointed" that news of the dispute had been made public, told a news conference he was being sued over his move to Premier League rivals Villa.
"What Norwich haven't made public is that they are suing me. Am I concerned Norwich fans are only hearing one side of the story? Yes," he said at the time.
($1 = 0.6180 British pounds) (Writing by Ken Ferris; Editing by Alison Wildey)