Morrissey, 53, sued the publication for a story titled "Morrissey: Big Mouth Strikes Again" in which he discussed the issue of immigration in Britain.
The case had been due to go to court after the singer won a pre-trial hearing at the High Court in October where the publication had sought to strike out his claim on the grounds of delay.
"NME is pleased that it has buried the hatchet with Morrissey in respect of the libel case he brought against us in 2007," a statement from the magazine said.
"Morrissey sued over an article based on interviews with him which he believed accused him of racism.
"After an on-going dialogue with Morrissey and his representatives, NME today publishes a clarification in the magazine and online which makes it clear that we do not believe we ever called Morrissey a racist and nor do we believe he is.
"We have said sorry to Morrissey for any misunderstanding that may have arisen."
The publication added that the settlement did not involve payment of damages or legal costs to the singer. A "small" sum was paid by NME last year on the court's orders.
In the original article, Morrissey was asked if he would ever move back to England, and was quoted as saying in reply:
"With the issue of immigration, it's very difficult because, although I don't have anything against people from other countries, the higher the influx into England the more the British identity disappears."
Morrissey's lawyer, John Reid, of Russells Solicitors, said: "My client is obviously pleased that the NME have finally and publicly apologised to him.
"This claim was never about financial damages, and no money was sought as part of a settlement. The NME apology in itself is settlement enough, and it closes the case".
