The Chief Constable of Humberside Police, David Westwood, is to return to duty on Monday.
David Westwood will step down a year early
The home secretary agreed to lift his suspension imposed in July following criticism after the Bichard inquiry into the Soham murders.
Mr Westwood, who is 55, has agreed to retire on 30 March 2005.
A new chief constable will now be appointed in order that he or she can take up the position in Humberside on 1 April 2005.
A spokesman for the home secretary, David Blunkett, said the decision with Humberside was not a climb-down.
He said it was "in the best interests of the people of Humberside" and was a "pragmatic" decision.
Mr Westwood was due to retire in March 2006, so he is stepping down a year early.
The spokesman said that would allow the process to find a successor to begin immediately.
He pointed out that had disciplinary proceedings continued it would have taken much longer to get a successor in place.
The agreement removes the prospect of a legal battle between the home secretary and the Humberside Police Authority.
The authority, which had backed Mr Westwood, was forced to suspend its chief constable after Mr Blunkett went to the High Court.
July's suspension was the first time the home secretary had used new powers to order a chief constable to step aside in this way.
Mr Westwood's solicitors, Kingsley Napley, said in a statement: "Mr Westwood is now to be given the opportunity to complete the work he has set out to do, which includes putting in place a major programme of improvements for the Humberside force.
"In doing so, he will honour the commitments he has made to the families of Jessica Chapman and Holly Wells, which he has always said he would do.
The chief constable was personally criticised by Sir Michael Bichard over failures in making vetting checks on Soham murderer Ian Huntley.
Between 1995 and 1998, Humberside Police had eight separate contacts with Huntley - four involving rape allegations
But intelligence checks failed to raise concerns and he was later able to secure a job as a school caretaker in Soham.