The company marketed itself as a destination for children and benefitted by selling advertising to toymakers and others seeking to connect with young audiences, according to the FTC.
The agreement includes a combined $170 million fine - $136 million to the FTC and $34 million to the NY attorney general - and requires YouTube change data collection on child-directed content on the platform.
The company is accused of collecting web data on children's YouTube channels in order to deliver millions of dollars in targeted advertisements to viewers.
The settlement with the Federal Trade Commission and the NY state Attorney General is the largest amount in a case involving the Children's Online Privacy Protection Act, a 1998 federal law, officials said.
"YouTube touted its popularity with children to prospective corporate clients", FTC Chairman Joe Simons said.
In addition to the monetary penalty, Google and YouTube must also develop, implement and maintain "a system that permits channel owners to identify their child-directed content on the YouTube platform so that YouTube can ensure it is complying with COPPA".
YouTube said it will rely on both machine learning and video creators themselves to identify what content is aimed at children.
"Today's changes will allow us to better protect kids and families on YouTube", Wojcicki wrote in the blog, which acknowledged the rising chances that children are watching the site alone.
"The FTC's complaint details Google's mixed messages about who the site is geared for, and includes as evidence Google presentations made to toy companies Mattel and Hasbro where YouTube is described as the "new Saturday Morning Cartoons" and the "#1 website regularly visited by kids".
As with the Facebook settlement, the FTC vote was 3-2, along party lines. Google was fined $22.5 million in 2012 for violating that settlement when the FTC found it improperly used tracking cookies on Apple's Safari browser.
FTC's Bureau of Consumer Protection director Andrew Smith said at a news conference Wednesday the settlement "is changing YouTube's business model, that YouTube can not bury its head in the sand, YouTube can not pretend that it is not aware of the content on its platform and hope to escape liability".
Investigators at the FTC and in NY agreed, finding that Google's own content rating systems had identified certain YouTube channels as directed toward children.
"No other company in America is subject to these requirements", he said.
FTC Democrat Commissioner Rohit Chopra noted that it was the third time since 2011 that the FTC sanctioned Google for privacy violations, calling the latest violation "extremely serious".
Some lawmakers and children's advocacy groups, however, complained that the settlement terms aren't strong enough to rein in a company whose parent, Alphabet, made a profit of $30.7 billion previous year on revenue of $136.8 billion, mostly from targeted ads.
The federal government has increased scrutiny of big tech companies in the last two years - especially questioning how the tech giants collect and use personal information from their billions of customers.
The settlement, which must be approved by a federal court, calls for the FTC to receive $136 million and NY state the remaining $34 million.
The company also introduced more parental controls for YouTube Kids, the app it launched in 2015 to offer a smaller selection of YouTube's massive library, and created a web version of the app. The FTC and NY attorney general charged YouTube with violating COPPA laws by collecting data on minors without parental consent.
YouTube has faced a number of child safety issues this year.
YouTube Kids does not target ads based on viewer interests the way YouTube proper does.
The FTC's fine against YouTube now needs to be approved by a federal court in Washington.
"The $136 million penalty is by far the largest amount the FTC has ever obtained in a COPPA case since Congress enacted the law in 1998", the FTC said in the press release.