Her lawyer, John Kelly, said that the actress suffered considerable embarrassment and distress over November report, the AP reports.
Kidman was not in court fir the announcement and the details of the settlement of the libel suit were not disclosed.
The newspaper's "Spy" column had reported that Kidman carried a bottle of a competitor's perfume while she was in London to promote her new film, "The Golden Compass."
Kelly said the newspaper had determined that the source of the report had invented the story.
He said The Daily Telegraph agreed to pay Kidman's legal costs and "substantial" damages. Kelly said she intended to donate the damages to the United Nations Development Fund for Women.