The world's No. 3 software company was also accused of making false statements about its sales practices and discounts and failing to meet its contract obligations to provide complete information about its sales practices.
Additionally, Oracle did not disclose higher discounts given to other customers and as a result the federal government paid more for its products than it should have, according to the Justice Department.
The settlement over false claims allegations is the largest involving the General Services Administration, which handles procurement for the federal government.
Resolutions like this one - the largest GSA false claims settlement in history - demonstrate our commitment to ensure taxpayers are not overpaying for the products and services they receive, Tony West, head of the Justice Department's Civil Division, said in a statement.
Oracle denied any wrongdoing or that it engaged in fraud as part of the contract, which dates back to 1998, and argued that many of the witnesses were no longer available or did not remember the events.
Nevertheless, company spokeswoman Deborah Hellinger said Oracle has therefore decided to avoid the distraction and high cost of litigating this case by settling.
The settlement represents about 11 percent of the $1.84 billion in net income Oracle had in the quarter that ended August 31.
The case involved a former Oracle employee who became a whistleblower, Paul Frascella, and he will receive $40 million as his share, according to the Justice Department.
Oracle shares closed up 56 cents, or 1.9 percent, at $30.07 in regular trading on the New York Stock Exchange.
(Reporting by Jeremy Pelofsky in Washington and Jim Finkle in Boston, editing by Carol Bishopric, Gary Hill)