The development ends over six months of ongoing legal talks.
Dyke had been warned he faced serious sanctions had he decided to keep the watch, made by the Swiss-based company who are a sponsor of the Brazilian Football Confederation (CBF).
Dyke was one of several top officials to be given the luxury watch, worth a reported $26,000 and he had initially refused to return it, claiming he was to auction it for British-based cancer charity Breast Cancer Care.
The 67-year-old is now set to give a donation to the charity as part of a fundraising initiative of around £500,000.
The Ethics Committee had originally said all watches must be returned by October 24 last year after it was found that they broke FIFA’s ethics rules, which bans members from accepting gifts of more than “symbolic or trivial value”.
FIFA were also adamant that if the watches were auctioned, any proceeds would have to go to charities in Brazil.
Around 65 members of the FIFA Family were given the gifts as part of a goody bag, although Dyke claimed at the time that he had no idea of how much the watch was worth.
Other leading football officials, such as UEFA President Michel Platini, also said he would not return the gift and it is not known how many of the 65 have been given back.
“Mr Greg Dyke has returned the CBF Parmigiani watch,” a FIFA statement said.
“As a consequence, the adjudicatory chamber of the FIFA Ethics Committee has decided to close the proceedings in respect of a possible breach of the FIFA code of ethics.”
The controversial gift caused FIFA’s Ethics Committee to launch an investigation, which was initially headed by American lawyer Michael Garcia until he resigned in December after FIFA decline to publish his full report into the World Cup bidding process.