The Danish pro, who took charge of the South Wales club in 2012, was sacked from his position and replaced with Garry Monk in February.
After confirming the settlement news, Swansea said on their official website: "The club would like to thank Michael for his work over the 18-month period where he guided the club to ninth place in the Barclays Premier League and the Capital One Cup trophy.
"Everyone at Swansea City Football Club would like to wish Michael all the best for the future. Both parties will not be issuing any further comments on this matter."
Monk was handed a permanent three-year contract in May.