Payments to the security company have been reduced by £48m to cover additional military and police costs, and by a further £37m for project management failures.
Games Organisers said the settlement ensured that taxpayers' interests were protected, while "at the same time recognising that G4S ultimately provided over 80% of the man-guarding hours it had contracted to supply".
Neil Wood, LOCOGs Chief Financial Officer said:
"We are pleased to have reached an agreement that protects taxpayers interests by reducing the payment due to G4S by £85m. The savings arising from this settlement brings the total savings to the public purse from the LOCOG venue security budget to £102m compared to the position in December 2011.
– Neil Wood, The London Organising Committee of the Olympic Games and Paralympic Games Ltd
"We would like to thank the Military and the Police for their exceptional and outstanding support during the Games in providing a robust, effective, professional and friendly security operation.
"We would also like to thank the G4S guards who worked alongside the Military, the Police and the Volunteers to deliver a safe and secure Games in spite of the high profile challenges faced by the G4S Group.
"The Home Office has been consulted on the settlement and fully supports the position reached between LOCOG and G4S."
G4S' £70 million loss over its London 2012 Olympic and Paralympic contracts follows months of negotiations with Games organisers Locog.
The security group also incurred additional costs of around £18 million relating to charitable donations, fees and the cost of sponsorship and marketing.
– Chief executive Nick Buckles
The UK Government is an important customer for the group and we felt that it was in all of our interests to bring this matter to a close in an equitable and professional manner without the need for lengthy legal proceedings.
G4S failed to provide all of its 10,400 contracted guards during the London 2012 Olympic Games, which meant the Government was forced to call in military personnel to provide extra security.
The two sides have since been in talks over a final settlement for the £240 million security contract.
Two G4S directors resigned in the wake of an independent review into the company's botched London Olympics contract, when the group only fulfilled 83% of contracted shifts.
Chief operating officer David Taylor-Smith and Ian Horseman Sewell, who was head of global events, carried the can for the fiasco, but Mr Buckles stayed in his post.
Security company G4S today said it will incur a loss of £70 million on its bungled Olympics contract, more than the £50 million previously estimated.
More soldiers have been arriving at Tobacco Dock in East London, their base camp during the Olympics. Extra troops have been drafted in to secure the Olympic Venues after security firm G4S failed to train enough staff. Phil Bayles reports.
Boris Johnson has called for the organisers involved in Olympic security should be allowed to concentrate on the games rather than answer questions about the failings of G4S. He suggested any inquiry should be delayed until September.
The Met Commissioner Bernard Hogan-Howe has told the London Assembly that he is confident the Olympics will have proper security. He also explained that the problems at G4S were made worse because the company assumed it had a communication problem and did not realise it was short of staff.
Boris Johnson has announced that the military personnel who have been brought in to protect the Olympics and Paralympics will get free use of public transport. Personnel who are wearing their uniforms will be allowed to use Transport for London services without being charged.