The Australian took action after being dropped from the elite umpires list following the controversial Oval Test between England and Pakistan in 2006.
The match was abandoned amid claims of ball-tampering by the Pakistan side.
Hair, 55, claimed he was singled out for punishment by the ICC because West Indian Billy Doctrove, who was his co-umpire at The Oval, escaped censure.
The ICC will decide next March whether Hair has a future in top-level umpiring.
In the meantime, he will participate in an ICC rehabilitation programme.
ICC chief executive Malcolm Speed said he was glad the matter was finally at an end.
"I'm very pleased that this claim has been unconditionally withdrawn," he told BBC 5live.
| | A lot will depend on the rehabilitation programme and his attitude towards it ICC chief executive Malcolm Speed on Hair's future |
Hair's case at an employment tribunal in London collapsed on Tuesday after more than a week of evidence.
It is understood that no financial pay-off was made to him and his return to top-flight umpiring has not been guaranteed.
"I think in six months we'll have a better idea," said Speed when asked if Hair would be able to officiate at elite level again.
"It's a matter for the board, which is a very diverse group generally with strong and differing groups, so a lot will depend on the rehabilitation programme and his attitude towards it.
"For the next six months he will umpire matches at associate level. I can't speculate as to whether he will return to umpiring full-member matches or not."
ICC president Ray Mali also welcomed Hair's decision to drop his case.
"We are pleased the issue has been resolved," said Mali. "We had no option but to defend these serious allegations."
Hair's solicitor said his client was glad he was now in a position to start thinking about his umpiring career again.
"This is really about getting back to umpiring top cricket matches," said Paul Gilbert.
"Darrell feels relieved and glad it's all over, and he does feel this is in the best interests of all parties.
"What we have now is a future for Darrell that leads to the possibility of his return to top-level umpiring."
The chain of events that ended up with Hair being stripped of his position began when he accused Pakistan of ball-tampering and awarded England five extra runs.
Pakistan, who were in a reasonably strong position, initially played on until the tea interval but their captain Inzamam-ul-Haq refused to take his players out for the resumption of play.
After a delay, Hair removed the bails and awarded the match to England by default.
At a meeting of the 10 Test-playing nations in November, the ICC said they had "lost confidence" in Hair, from New South Wales, and that he would be excluded from the umpires list until his contract expired in March 2008.
No action was taken against co-umpire Doctrove, leading to Hair's accusation that he had been singled out because he was a white umpire.
Inzamam was cleared of ball tampering by the ICC but banned for four matches for bringing the game into disrepute.
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