The parties were locked in court-ordered mediation in Melbourne for over two days as former Wallabies star Folau sought to claim 14 million Australian dollars in lost wages and sponsorships.
The 30 year-old, a devout Christian, was sacked in May after sparking outrage with a controversial social media post.
RA terminated his contract for a "high-level breach" after he posted hell awaits "drunks, homosexuals, adulterers, liars, fornicators, thieves, atheists and idolaters" on Instagram.
The ex-Waratahs back, who was also suing NSW Rugby, had been previously warned over his online posts in 2018.
Neither party disclosed the terms of the settlement, which prevents the dispute from moving to a public trial.
"The social media post reflected Mr Folau's genuinely held religious beliefs, and Mr Folau did not intend to harm or offend any person when he uploaded the social media post," a joint statement read. "Mr Folau wants all Australians to know that he does not condone discrimination of any kind against any person on the grounds of their sexuality and that he shares Rugby Australia's commitment to inclusiveness and diversity.
"Rugby Australia and NSW Rugby do not in any way agree with the content of the social media post. Inclusiveness is one of rugby's core values and it welcomes all people to the game, including all members of the LGBTI community.
"While it was not Rugby Australia's intention, Rugby Australia acknowledges and apologises for any hurt or harm caused to the Folaus.
"Similarly, Mr Folau did not intend to hurt or harm the game of rugby and acknowledges and apologises for any hurt or harm caused.
"Rugby Australia and Mr Folau wish each other well for the future. The parties do not intend to comment further on the terms of their settlement as it is confidential."
Folau, who won 73 international caps, had claimed to have lost out on the chance to play at two World Cups and the opportunity to become Australia captain.
In a fresh controversy last month, Folau's comments linking the bushfires in Australia to gay marriage and abortion were slammed as "appallingly insensitive" by the nation's prime minister Scott Morrison.