Volkswagen model vehicles on a dealer lot in Bedford, Massachusetts, USA. Photo: Cj Gunther/Picture Alliance/DPA
Volkswagen issued a statement saying it had reached an agreement in principle with VW-branded suppliers after more than a month finalizing the accord.
"Under the proposed agreement, Volkswagen has agreed to make a maximum total of $1.208 billion in cash payments to eligible dealers and to provide additional benefits to resolve alleged past, current and future claims of losses in franchise value," the statement read.
Both parties had announced an agreement in principle on 25th August.
The finalised accord was filed with the district court for the Northern District of California in San Francisco where it is subject to the approval of a judge.
The cash - half up front and half in monthly instalments over 18 months - will be shared among 652 dealers, lawyers representing them said, for ana verage settlement of around $1.9 million.
Volkswagen has also agreed to buy back affected vehicles still in dealer lots.
The deal comes on top of the $14.7 billion in US compensation and fines Volkswagen has already agreed to pay regarding some 480,000 two-liter models.
The firm has yet to find a solution regarding a further 80,000 3-liter models affected by the scam.
US authorities have given the company until the end of this month to show if they can be fixed.
Volkswagen has been struggling to rise above the fallout of a scandal which emerged in September 2015 when it admitted installing so called "defeat devices" in 11 million diesel vehicles worldwide, which increase exhaust treatment when the car detects it is undergoing regulatory off-road tests.
The software deactivates the emissions system when the car is on the road, leading to levels of harmful nitrogen oxides in the exhaust many times higher than permitted.
The multibillion cost of dealing with the crisis saw Volkswagen last year register its first annual net loss in more than 20 years.
If Friday's supplier agreement marked a milestone in the civil legal fallout in the United States, VW still faces mountains of legal claims and investigations worldwide.
The group has set aside 18 billion euros to pay for the legal costs of the crisis but analysts estimate the final bill could be double that amount.