The settlement followed overnight negotiations between lawyers representing the states, Bloomberg reported on Monday, citing a person familiar with the matter.
Four states — Massachusetts, New York, Connecticut and Minnesota — had initially resisted the settlement but decided that continuing the legal battle without California was not worth the expense, according to the report.
The agreement reportedly includes measures to protect the editorial independence of CBS News and CNN, with both networks to have independent editorial boards.
The terms are also said to include a financial penalty if Paramount fails to release 30 films annually in cinemas.
Paramount, which is led by David Ellison, won a bidding war against Netflix in February to acquire Warner Bros. Discovery's assets, including Warner Bros. Pictures, CNN and the HBO Max streaming service.
The US administration approved the transaction in June without requiring changes to Paramount's business, but 12 states subsequently sued to stop the deal.
California led the lawsuit, joined by Arizona, Colorado, Connecticut, Massachusetts, Minnesota, Nevada, New Jersey, New Mexico, New York, Oregon and Washington.
The states argued that the merger would give the combined company control of about 27 per cent of wide-release theatrical film distribution and a similar share of basic cable channel licensing.
Paramount's financing for the takeover reportedly includes about $24bn in equity from sovereign wealth funds in Saudi Arabia, Qatar and Abu Dhabi.
Ellison's father, billionaire Oracle founder Larry Ellison, also provided funding and a key guarantee for the transaction.
Opponents in the film industry had warned that the merger could lead to job cuts in an already pressured Hollywood and reduce the number of films produced annually.
News organisations also raised concerns about the potential impact of the merger on CNN's editorial independence.
The development came days after US President Donald Trump barred CNN, Politico and MS NOW from the White House. The three outlets are suing the administration in an attempt to have the decision reversed.
Paramount had also threatened to leave California if state Attorney General Rob Bonta did not negotiate an end to the lawsuit.
The European Union has already approved the merger after Paramount agreed to certain concessions.
Paramount and the offices of the California and New York attorneys general had not immediately commented on the reported settlement.
A formal announcement of the agreement was expected later on Monday.
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