Simon Smith, a partner with the London law firm Schillings, told London's High Court that the article alleged that Diaz had a "smooching session" with a married producer who worked on her MTV show, "Trippin."' The article was posted to the magazine's Web site in May 2005.
After Diaz complained, the photographs were removed from the Enquirer's Web site and were not published in editions of the magazine distributed in Britain.
The lawsuit was settled out of court, Smith said, and the terms of the agreement were confidential. In court, he said the damages paid were "substantial."
In a statement read to the high court Friday, the magazine "apologized unreservedly" for any distress caused to the 34-year-old Diaz, her former boyfriend Justin Timberlake, as well as the producer and his wife.
Sam Howard, the Enquirer's lawyer, said the magazine "entirely accepts that the allegations were without foundation and ought never to have been published."
It was the second settlement in the case for Diaz: In July 2005, The Sun paid the actress -- star of the "Charlie's Angels" films and "There's Something About Mary" -- undisclosed damages after settling out of court over the same story.