Financial terms of the agreement were not disclosed, but The Associated Press reports the deal is worth $3.6 million. A hearing had been scheduled to take place Monday in St. Petersburg, Fla.
Chacon, the last Yankees player eligible for salary arbitration, asked the Yankees for $4.15 million. The Yankees had offered $3.1 million.
The 28-year-old Chacon was acquired from the Colorado Rockies on July 28 for right-handers Ramon Ramirez and Eduardo Sierra, and he quickly became an unexpected success story.
In 14 appearances (12 starts) for New York, Chacon went 7-3 with a 2.85 ERA, giving the rotation a major boost as the Yankees pursued the postseason. Appearing to rediscover his curveball down the stretch, Chacon won his last three regular-season decisions, allowing just one run over 22 2/3 innings.
An All-Star with Colorado in 2003, Chacon made one start for the Yankees in the American League Division Series against the Angels, pitching 6 1/3 innings in a no-decision in the Yankees' Game 4 victory at Yankee Stadium.
Manager Joe Torre said recently that he plans to use Chacon among the six pitchers -- Randy Johnson, Mike Mussina, Carl Pavano, Chien-Ming Wang and Jaret Wright are the others -- who will start exhibition games during Spring Training.
Yankees pitchers and catchers report to Legends Field in Tampa, Fla., on Thursday.
Bryan Hoch is a contributor to MLB.com. This story was not subject to the approval of Major League Baseball or its clubs.