"Pfizer and families of the victims of the drug trial have reached an out-of-court settlement in principle but have agreed to meet in Rome in March to put the deal in writing," the source told AFP, without disclosing the amount of compensation involved.
The settlement follows months of negotiations between Pfizer and the Kano state government which represents the victims.
The talks were brokered by Nigeria's former military leader Yakubu Gowon and US former president Jimmy Carter, said the source, who did not want to be named.
Kano state filed civil and criminal suits against Pfizer demanding $2.75bn in compensation for what it said was an illegal test of the meningitis vaccine Trovan on 200 children in 1996.
Eleven children are alleged to have died from the drug test which also caused deformities in 189 others.
Pfizer has denied any wrong-doing and insisted that the trial conformed to ethical practices and was carried out with the consent of the Nigerian government.
A separate $6.5bn-suit has also been lodged against the US drug firm by the Nigerian federal government.