The settlement was announced the same day the divorce trial was scheduled to resume in New York, People magazine reported. Terms of the settlement were not released.
"I'm happy with the agreement and look forward to the opportunity to rebuild my relationship with my children," Michael Lohan said in a statement through his attorney. Lohan's father is in prison for crimes including assault and driving while impaired.
Lindsay, 19, wrote several songs about her shattered family life for her new album, "A Little More Personal (Raw)."
The star flew home from London and canceled the remainder of her European tour this past summer for "Herbie: Fully Loaded" to support her mother, Dina, when the divorce trial began.