Public prosecutors said the $7 billion agreement is meant to compensate the state for the socioeconomic and environmental damage caused by the disaster. But it doesn’t affect the many pending homicide and other criminal charges in the case against the world’s largest iron-ore miner and former executives, including Vale’s previous chief executive,

Fabio Schvartsman.

The attorney general of Minas Gerais state,

Jarbas Soares Júnior,

said he hoped the size of Thursday’s settlement would send a message to the rest of the world: “We will not accept the exploitation of our resources without a minimum level of commitment to social and environmental responsibility.”

Vale accepted the decision and said it would book an additional expense of about $3.7 billion in its 2020 results.

“Vale is committed to fully repair and compensate the damage caused by the tragedy in Brumadinho and to increasingly contribute to the improvement and development of the communities in which we operate,” CEO

Eduardo Bartolomeo

said. “We know that we have work to do and we remain firm in that purpose.”

Vale’s investors welcomed the settlement as a way to avoid a drawn-out court battle, as did public prosecutors who cited other lawsuits over environmental problems in the state that haven’t been resolved after nearly 20 years.

The miner’s shares, which have increased about 60% in value since the dam collapsed, initially rose after news of the settlement, signaling investors’ hopes that the company can finally move past the disaster.

“Vale was able to get a discount of about one-third based on what the state government was asking, so they were skillful in this negotiation,” said

Ilan Arbetman,

an equities analyst at the Brazilian brokerage Ativa Investimentos. The miner has already provisioned a big part of the agreed value and is benefiting from high iron-ore prices, he said.

When Vale’s dam burst near the town of Brumadinho in January 2019, it unleashed a tsunami of mining waste speeding down the valley at up to 50 miles an hour, wiping out the on-site canteen where many workers were at lunch and destroying nearby homes and a guesthouse.

Two years later, the bodies of 11 victims still haven’t been found.

The collapse, one of the deadliest anywhere in the world, came only three years after a dam at another iron-ore mine jointly owned by Vale ruptured 100 miles away in the town of Mariana, killing 19 people and polluting more than 400 miles of river. The company vowed at the time that such a disaster would never happen again.

The settlement funds will be spent on environmental projects and shoring up local water supplies as well as improving transport networks and health services. The agreement also includes Vale’s initial costs in the aftermath of the disaster, when the company paid for temporary housing, mental-health professionals and emergency monthly stipends for residents.

Suicides and attempted suicides in Brumadinho soared in the year following the collapse, particularly among women. Some lost their husbands, sons and fathers at the mine, one of the region’s biggest employers, and were forced to wait months for rescue workers to recover the remains of their loved ones from the hardened mud.

Following the Mariana collapse in 2015, Vale and its partner at that dam,

BHP Group Ltd.

, created the Renova Foundation to manage compensation, which said it had paid out about $2.1 billion as of December last year. Prosecutors have said they believe that the second dam collapse in 2019 might not have occurred if Vale and BHP had faced tougher consequences for the first one.

In January last year, Brazilian prosecutors charged former Vale CEO Mr. Schvartsman and 10 others from the mining company with homicide. They also filed homicide charges against five people at Germany’s TÜV SÜD, the auditing company that certified the mine-waste dam as safe months before it ruptured.

All 16 people, including several high-level executives and directors at Vale, were also charged with environmental crimes, as were both companies as entities. Those charges are still being disputed in Brazil’s court system.

Prosecutors said last year it was clear that the dam had presented a critical structural risk since at least 2017 and that Vale had been fully aware of its safety problems. The German inspector certified the dam as safe despite also knowing about its structural problems, eyeing a chance to win multiple contracts with Vale and expand its Brazilian operations, they said.

As part of a year-long investigation into the disaster, The Wall Street Journal first reported in February 2019 the conflict of interest between Vale and TÜV SÜD, which worked as both an internal consultant and an independent safety evaluator for the miner.

A spokeswoman for Vale said Thursday that the miner wasn’t aware of an imminent risk at the dam. TÜV SÜD said it reiterated its commitment to “see the facts of the dam’s collapse clarified,” adding that it was cooperating with authorities. Mr. Schvartsman and the individuals facing criminal charges have denied wrongdoing in the case.

In recent years, Brazil’s public prosecutors have battled big companies with little success. After an oil spill off the coast of Rio de Janeiro in 2011, prosecutors filed lawsuits against

Chevron Corp.

for more than $7 billion. Two years later, they settled with the U.S. oil giant for $55 million.

Write to Samantha Pearson at samantha.pearson@wsj.com and Jeffrey T. Lewis at jeffrey.lewis@wsj.com