A state and federal investigation had raised allegations that the automaker had violated the Clean Air Act by failing to properly disclose the defect.

The settlement announced Wednesday clears the company of those charges.

"This is the result of some extensive negotiations," Chrysler spokesman Mike Aberlich told AFP. "Both the EPA and California acknowledged that we acted in good faith and haven't broken the law."

The Environmental Protection Agency said the settlement was the largest yet for an emission-related defect reporting case.

"Cleaner cars require emissions control systems that work, and prompt measures to fix emission-related defects when they occur," Phyllis Harris of the EPA's Office of Enforcement and Compliance Assurance said in a statement.

"This case demonstrates EPA's commitment to ensuring that automobile manufacturers comply with their emission-defect reporting and emission system obligations under the Clean Air Act."

Under the terms of the settlement, the automaker will pay a 1 million dollar civil penalty to the both the EPA and the California Air Resource Board.

It must also invest 3 million dollars in research to find ways to reduce emission from diesel engines currently in use.

The main expense will come from recalling and repairing affected vehicles, which the EPA estimated would cost 90 million dollars.

DaimlerChrysler must extend the warranties on the catalytic converters in about 700,000 vehicles, recall about 500,000 vehicles to fix a separate defect in the on-board diagnostic system, and implement enhanced defect reporting systems.

The recalls affect 1996 through 2001 Dodge and Jeep vehicles.

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