"Both parties have agreed to license certain of their patents to the other on the basis of mutual respect for each other's intellectual property rights," the company said in a statement.
After signing the agreement, they will dismiss all pending legal actions, it said without disclosing financial details of the deal.
AUO last month launched counter moves against Sharp, which had accused the firm and six other companies, all AUO customers using its panels in their products, of infringing patented liquid crystal display technologies.
Sharp sought an order to prohibit imports and sales in the United States of LCD panels and modules that use the technology in two complaints filed with the US International Trade Commission and District Court for Delaware.
The six AUO customers involved in the Sharp suit included South Korea's LG Electronics and China's Haier.