The settlement came after a five day hearing in the High Court detailing WPP's case against Benatti, who it alleged to have secretly pocketed millions of pounds from a deal he helped to broker.
Mr Justice Walker was today told the parties had reached a confidential settlement and were calling off the case; this meant Sorrell was spared from taking the witness stand later this week.
WPP's lawyers claimed that Benatti was the "secret beneficiary" of most of the proceeds from a £17m takeover of Media Club, an Italian media buying agency.
Benatti was sacked as the Italian director of WPP in January 2006 and WPP were claiming up to £12.5m for breach of "fiduciary duty".
Benatti hit back with a counterclaim for unfair dismissal, insisting that the real reason he was sacked was because he had fallen out with Daniela Weber, WPP's chief operating officer in Italy, with whom he alleged Sorrell was having a relationship.
He has dropped this claim as part of today's settlement.
The two sides have issued the following statement: "WPP and Mr Marco Benatti have agreed to a full and final settlement of the disputes between them, which are the subject of the proceedings currently before the English High Court and related proceedings in Italy."
Sorrell last year brought a libel and breach-of-privacy action against Benatti, accusing him of circulating a computer-generated image showing him with Weber labelled "the mad dwarf and the nympho schizo".
Sorrell eventually accepted £120,000 damages without Benatti accepting liability.