The settlement comes after Pavarotti lost an appeal in Modena against a demand for 10 billion lire (£3.2 million) in back taxes last week.
Italy's tax inspectors prosecuted the opera singer - who achieved huge sales recording as one of the Three Tenors - four years ago to recover money owed from alleged tax evasion in 1989 and 1991.
One of the world's highest-paid entertainers, the 64-year-old disputed the charge on the grounds that he was resident in the tax haven of Monte Carlo.
The settlement comes after Pavarotti lost an appeal in Modena against a demand for 10 billion lire (£3.2 million) in back taxes last week.
In April, prosecutors in Bologna wanted to put Pavorotti on trial on tax fraud charges.
They claimed his primary residence could not be Monte Carlo, as he has a huge estate in Modena, his birthplace in northern Italy, and a luxurious villa at Pesaro, on the Adriatic coast.
Photo opportunity
As part of the settlement, Pavarotti is to get a personal meeting and a photo opportunity with the finance minister, Ottaviano del Turco, on Thursday.
Mr Del Turco has hailed the tax payment by one of Italy's best known performers as a sign that top Italians are gradually learning that they have to pay their taxes.
The minister insisted that Pavarotti had paid his taxes down to the last lira and that no discount had been offered.
"This 25 billion that I'm going to pay is not a punishment, but because I am an honourable Italian citizen," the tenor wrote in a note to Turin's La Stampa newspaper on Thursday.
"I have always paid taxes, especially in the places where I have sung, but the state doesn't think I've paid enough.
"It's very difficult to explain the life of one who travels the world," he wrote. He claimed he visits more than 50 cities each year and pays taxes in many of them.
'Satisfied? Yes and no'
The singer told the Italian public television channel RAI that he felt "relieved" that the matter was finally over.
"Satisfied? Yes and no," said the celebrated tenor.
"Yes because it's the end of a legal process which left me feeling very bitter. No, because I have to put my hand in my pocket and produce billions of lire."
Pavarotti is just one of dozens of Italian celebrities under investigation for tax evasion.