The U.S. originally asked Seoul to pay about $1 billion.
"We have a number of domestic steps that we need to go through", Foreign Minister Kang Kyung-wha said as she met with the top USA negotiator Timothy Betts. A five-year 2014 deal that covered South Korea's payment last year had expired at the end of 2018. The North and its main backer, China, also would like to see the US military presence removed from their doorstep.
The allies had failed to reach a new cost-sharing plan during some 10 rounds of talks.
"The United States government realizes that Korea does a lot for our alliance and for peace and stability in this region", Betts said.
Other analysts observe that Seoul is effectively paying for a military deterrent by paying part of the costs of US Forces Korea - and that it is actually cheaper than it would be to provide a similar deterrent in the form of a larger South Korean defense budget.
The deal, which involves the spending of South Korean taxpayer money, requires parliamentary approval in South Korea, but not in the United States, according to Seoul's Foreign Ministry. "We are very pleased our consultations resulted in agreement that will strengthen transparency and deepen our cooperation and the alliance".
Over multiple rounds of talks held last year, the U.S. compromised on the amount, but the USA maintained that the deal should be valid for only a year.
Some conservatives in South Korea voiced concerns over a weakening alliance with the United States at the same time as negotiations with North Korea to deprive it of its nuclear weapons hit a stalemate.
About 28,500 U.S. troops are stationed in South Korea, where the USA has maintained a military presence since the 1950-53 Korean War.
During his annual State of the Union Address on February 5, Trump announced that he will meet with North Korean leader Kim Jong Un for a second time on February 27-28 in Vietnam. During his election campaign, Trump suggested he could pull back troops from South Korea and Japan unless they took on greater a share of the financial burdens of supporting USA soldiers deployed there.
The ministry said that although the USA had demanded a "huge increase" in payment, they were able to reach an agreement that reflects "the security situation of the Korean peninsula". But with US President Donald Trump calling for his allies to pay an increased share of their defense costs, South Korea was under pressure to pay almost double the current amount, equivalent to nearly $1.4 billion a year.
Kim Jong-un and Trump first met last June in Singapore, where they signed a vaguely worded document in which Kim pledged to work toward the "denuclearization of the Korean peninsula".
Seoul said Sunday it agreed to hike its payment for maintaining American troops on its soil, settling a dispute with its longtime ally ahead of a second summit between the U.S. and North Korea.
The United States, meanwhile, reaffirmed the need for a "stable US military deployment" and offered assurances that it has no plans to change the number of forces on the divided peninsula, the Foreign Ministry said in a press release.
South Korea has hosted American troops since the two countries fought together against the communist-backed North in the 1950-53 Korean War, which ended in an armistice instead of a peace treaty.