The former NSW deputy premier on Friday withdrew his Federal Court claim over two videos, titled bruz and Secret Dictatorship, published to Shanks's YouTube channel in 2020.
The withdrawal came as Shanks, through his lawyer, told the court "freedom of expression is important" but accepted some videos were offensive to the retiring MP.
"Mr Shanks understands he has been hurt and apologises," Dr Matt Collins QC said.
As part of the settlement, Shanks will cover $100,000 in legal costs incurred by Mr Barilaro in pre-trial hearings and will edit the two videos.
The production of videos about Mr Barliaro and the sale of related merchandise will also cease upon the Eden-Monaro MP's departure from public life.
Shanks had sold keyrings of Mr Barilaro's face on a scrotum and a "Super Barilaro Bruz" T-shirt with a character resembling Nintendo's Mario stepping on a koala.
Mr Barilaro, who is of Italian heritage, had claimed the videos included a "vile and racist" attack and played a large role in his retirement from public life.
In one video, the entertainer refers to Mr Barilaro as a "big, fat, wog c***", "greasy Ned Kelly" and "a conman to the core, powered by spaghetti".
"I am grateful for and accept Mr Shanks' apology to me and trust that we can now each move on with our lives," he said in a statement.
The friendlyjordies channel, created by Shanks in 2013, has close to 600,000 subscribers and 153 million views.
Shanks raised more than $1 million to defend the lawsuit, with his solicitors saying the case went to the heart of a citizen's right to challenge, investigate and criticise politicians.
"Our client will not be paying a cent in damages to Mr Barilaro," solicitor Mark Davis said in a statement on Friday.
"Not one video will be taken down."
Justice Stephen Rares thanked the parties for resolving the "very difficult dispute".
A 10-day hearing was scheduled for March.
The former NSW Nationals leader's case against YouTube owner Google continues.
Mr Barilaro launched the case in May, alleging the bruz video wrongly insinuated he was a "corrupt conman" and had "so conducted himself in committing perjury nine times that he should be gaoled".
Shanks claimed the allegations were substantially true, citing comments made in a parliamentary committee, but was unable to use the comments as doing so would breach parliamentary privilege.
The court in August said Shanks' publication was not "spontaneous or unprepared" or a response to an attack made by Mr Barilaro on him under parliamentary privilege.
The MP and the entertainer may still face off in court, with police maintaining their criminal prosecution of friendlyjordies Kristo Langker over alleged intimidation of Mr Barilaro in Sydney.
Langker has pleaded not guilty to two charges, with a hearing set for May 2022.
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