The bank engaged in schemes to hide clients' funds so they could avoid paying US income taxes between 2002 and 2012, the Justice Department said.
In a quarterly earnings report in August, the bank said it had set aside 425 million shekels ($117.75 million) during the quarter to cover a likely fine by US authorities. The bank had previously set aside 161.9 million shekels ($44.86 million).
Mizrahi Tefahot said in a statement it would provision the rest of the payment in its fourth-quarter results, which will be published later in March.
"The end of the investigation will allow the bank to focus on achieving its strategic targets and to return, during the course of the year, to distributing dividends," the bank's chief executive, Eldad Fresher, said.
In August, the bank rejected a proposal from the Justice Department to pay a fine of $342 million to settle the tax evasion investigation, saying at the time that any "reasonable calculation" based on its employees' behavior would result in a significantly smaller fine.
The bank noted that it held intensive talks with US authorities since rejecting the offer in August.
The Justice Department said the $195 million payment includes $53 million in restitution, $24 million in disgorgement, and a fine of $118 million.
Mizrahi Tefahot said it had assumed responsibility for the actions of former employees who acted contrary to the bank's policies and procedures.
Moshe Vidman, chairman of the bank's board, said he was satisfied the negotiations yielded positive results and led to an agreed settlement.
Larger rival Bank Leumi underwent a similar investigation and paid $400 million in fines to US authorities in late 2014.
Hapoalim, one of Israel's two largest banks along with Leumi, last week said it would set aside an additional $246 million to cover a potential settlement of a US investigation into possible tax evasion by the bank's clients.
This provision, to be taken in the fourth quarter of 2018, will bring its total provisions to $611 million, while Hapoalim said it had held talks with U.S. justice officials in recent weeks. It added that the settlement amount may even be significantly higher.