"We are not going to argue any more," Bavarian Finance Minister Markus Söder said as he and Austrian counterpart Hans Jörg Schelling signed what they both called an "acceptable result".
The spat centred on bank Hypo Group Alpe Adria (HGAA), the state lender in the Austrian state of Carinthia.
Bavaria's state lender BayernLB bought a majority stake in 2007 in HGAA but two years later, as the global financial crisis raged, the bank came close to collapse and Austria nationalised it.
BayernLB received a symbolic three euros for its stake and Bavarian and Austrian taxpayers were saddled with billions in losses in the subsequent winding-down.
Bavaria sued Austria for €2.4 billion, and Austria counter-sued Bavaria for €3.5 billion for allegedly failing to provide a complete picture of HGAA's dire financial position.
Subsequently Hypo was split up, with the bad debts ring-fenced in a "bad bank" known as Heta Asset Resolution, and is continuing to cause Austria problems with HGAA creditors.
The case is a legacy of late Austrian far-right political Jörg Haider, formerly the governor of Carinthia.
Under Haider, who died in 2008, the bank expanded into the Balkans as well as Italy and Germany via acquisitions and risky investments, expanding its balance sheet fourfold to some €40 billion.