League One Leeds were unhappy that academy prospects Louis Hutton and George Swann were both lured away by the Premier League club and rejected an initial offer of £70,000 for the pair.
However, City have now upped their offer to end the row after Leeds chairman Ken Bates revealed the two clubs have reached agreement.
Good deal: Ken Bates (left) has done well from the likes of Luke Garbutt
Bates was basing any claim on what his club received from Everton for 16-year-old defender Luke Garbutt. The Toffees were told to shell out £600,000 - rising to £1.55m - by a tribunal.
In 2006, Leeds were awarded £4m in compensation from Chelsea after they signed Tom Taiwo and Michael Woods.
Leeds have already called for Premier League clubs to be docked points for poaching players - although neither Manchester City nor Everton have been found guilty of breaking any rules in their dealings with the youngsters and face no charges.
Reports in The Times suggest City are looking to establish a link with French second division side Arles-Avignon by which they could loan youngsters out to gain experience, and will meet with them this week to finalise a deal.
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