The Metropolitan Police 'unreservedly' apologised to the woman after she alleged assault, negligence, deceit and misconduct by senior officers.
The mammoth compensation sum comes after a lengthy legal battle over undercover police beginning relationships with women they were spying on.
The payment to the former animal rights activist is part of an agreement for her to drop her legal action.
Former Special Branch detective Bob Lambert used the pseudonym Bob Robinson and was tasked with infiltrating the Animal Liberation Front in the 1980s.
During that operation he had a relationship with a 22-year-old activist who is known by the name Jacqui - even though he was already married with children.
In 1985 she gave birth to their child, but when the boy was two years old, Bob vanished.
Jacqui only discovered her son's father was an undercover policeman in 2012 after he had been outed by other campaigners.
She said: "The legal case is finished but there is no closure for me.
"There is the money, but there is no admission by the police that what they did was wrong, there is no meaningful apology and most importantly there are no answers.
"I don't know why I was singled out by the police to be duped into an intimate sexual relationship with Bob Lambert.
"I don't know if he was paid overtime to be with me during the 14 hours of labour I went through giving birth to our son. I feel violated."
A Scotland Yard spokesman said the force 'unreservedly apologises for any pain and suffering that the relationship with Bob Lambert, an undercover officer, has had on this woman', but said that it had 'never had a policy that officers can use sexual relations for the purposes of policing'.
He added: "We recognise the impact that the revelation that he was an undercover police officer must have had both on her and her son."