The article ran on November 28 in the paper's Spy column and reported that Kidman, while in London to promote her new film, 'The Golden Compass', had angered Chanel by attending press junkets with a bottle of Jo Malone, her "favourite perfume".
It reported that Kidman was seen openly promoting the competitor's product and applying the perfume inbetween her interviews.
Kidman became the face of Chanel in 2003 when she signed a multimillion-pound contract.
John Kelly, Kidman's solicitor, told London's High Court that the 40-year-old Oscar winner had suffered considerable embarrassment and distress over the story.
Kelly said that the story meant that Kidman had acted in an unprofessional and disloyal manner by snubbing Chanel, had broken the terms of her contractual obligations and had proved she could not be trusted to honour them.
The Daily Telegraph did concede that the allegations were "invented" by the source and agreed to pay undisclosed libel damages, as well as paying Kidman's legal fees.
The broadsheet has issued a published apology and printed a retraction as per the terms of the settlement. Kidman is reportedly donating the money to Unifem, the United Nations Development Fund for Women.
David Price, the newspaper's solicitor-advocate, sincerely apologised on its behalf.
This article was first published on brandrepublic.com