The six-figure payout to the former head of Haringey children's services Sharon Shoesmith "stinks", a former government minister has said.
Conservative MP Tim Loughton said the settlement would "leave a really bad taste in taxpayers' mouths".
In 2011, Ms Shoesmith, who earned £133,000 a year, won a ruling that she was unfairly sacked after a damning report about the death of Baby Peter.
BBC Newsnight revealed the payout could cost Haringey Council up to £600,000.
Peter Connelly, who was 17 months old, died in 2007 after months of abuse.
The boy had more than 50 injuries, despite being on the at-risk register and receiving 60 visits from social workers, police and health professionals over eight months.
'Botched job'- 3 August 2007: One-year-old Peter Connelly (Baby P) found dead in his cot
- 11 November 2008: Peter's mother, Tracey Connelly, boyfriend Steven Barker and brother Jason Owen convicted of causing his death
- 13 November 2008: Ed Balls orders inquiry into role of the local authority, the health authority and the police
- 8 December 2008: Ms Shoesmith is sacked with immediate effect
- 22 May 2009: Connelly, Owen and Barker all get lengthy jail sentences
- 15 September 2010: Ms Shoesmith asks a House of Commons committee why the police and health services had not also been made to take responsibility
- 27 May 2011: The Court of Appeal rules in favour of Ms Shoesmith
- Oct 2013: Ms Shoesmith agrees a six-figure payout with Haringey Council
Three people were jailed in 2009, including his mother.
The Court of Appeal concluded Ms Shoesmith had been "unfairly scapegoated" and her removal from office in December 2008 by the then Children's Secretary Ed Balls had been "intrinsically unfair and unlawful".
One government source told BBC Newsnight that the cost to Haringey Council could be as high as £600,000, although Ms Shoesmith is expected to receive a lower sum.
The exact figure may not emerge as there are confidentiality clauses preventing its disclosure but it will be significantly short of the £1m figure it had been reported she was seeking.
However, it would appear the package is more than the minimum suggested by senior judge Lord Neuberger in a 2011 ruling in the Court of Appeal. He suggested Ms Shoesmith was entitled to a minimum of three months' salary plus pensions contributions.
Three months' salary would have been about £33,000.
Mr Loughton, a former children's minister, told BBC Radio 4's Today programme the payout became "inevitable" after the Court of Appeal ruled that Mr Balls "had made a complete botched job of her dismissal".
But he added: "This is going to leave a really bad taste in taxpayers' mouths that a not insubstantial amount of public money is being used to pay off somebody who presided over a dysfunctional department in Haringey [where] a 17-month-old boy died in horrific circumstances.
"We are effectively rewarding failure and when you are appointed a director of children's services... the buck has to stop somewhere and somebody has to take responsibility, and you don't expect that person... to get a large cheque on the back of it as well."
Gove 'furious'A statement from Haringey Council confirmed it had reached a settlement with Ms Shoesmith but that the terms of the settlement were confidential and it was unable to comment further.
Some of the cash will come from central government, but Haringey council will foot most of the bill, it is understood. An exact figure is yet to be agreed.
The Department for Education declined to comment on the story when contacted by the BBC.
But one source told Newsnight that Education Secretary Michael Gove was "furious" about the secrecy over the amount paid to Ms Shoesmith, believing it to be "indefensible".
Lawyers representing Haringey Council and Ms Shoesmith had been in lengthy discussions regarding a settlement since the May 2011 ruling.
Ms Shoesmith had been due to return to court later this week, seeking a declaration that she remained employed by Haringey Council.
That action has now been dropped and the settlement reached between the two parties is understood to be a final one.
Peter Connelly's mother, Tracey Connelly, her boyfriend, Steven Barker, and his brother, Jason Owen, were jailed in May 2009 for causing or allowing the child's death.
Earlier this month it was reported that Connelly was due to be released from prison on parole.
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