Mr Cruise says he wants to protect his children
The actor dropped a $100m lawsuit against publisher Michael Davis after the retraction, which was approved by Los Angeles Superior Court Judge Emilie Elias.
"The story was false," Mr Cruise's lawyer, Bert Fields, said. "He's not gay and the judge so ruled."
Mr Davis, for his part, was also said to be happy with the outcome.
Video tape
The case centred on Mr Davis's allegation that he had received a video tape from Germany which showed Mr Cruise performing homosexual acts.
The actor sued, saying "no such videotape exists or has ever existed or could ever exist".
According to the court settlement, Mr Davis's claim to have a video showing the actor "engaged in an (illicit) homosexual relationship" was untrue.
"Plaintiff Tom Cruise does not appear on the videotape to which said defendant referred in his statement alleged in the complaint," the settlement said.
"Plaintiff is not, and never has been, homosexual and has never had a homosexual affair."
Reward
Mr Cruise's lawyer said after the ruling that the actor was a "great believer in everybody's freedom to choose his own sexual preference".
Not all film-goers, however. felt the same, "especially when (Mr Cruise) has to play a heterosexual male lead", he added.
Speaking for Mr Davis, lawyer Edward Pilot said his client was happy with the settlement:
"My client was sued for $100m. He ended up not having to pay Cruise even a single dollar. So we're extraordinarily pleased with the outcome."
Mr Davis, who publishes Bold Magazine, had offered a $500,000 reward to anyone who could provide incontrovertible proof that Mr Cruise was gay.