The settlement requires Google and YouTube to pay $136 million to the FTC and $34 million to New York for allegedly violating the Children's Online Privacy Protection Act (COPPA) Rule.
The $170 million penalty is by far the largest amount the FTC has ever obtained in a COPPA case since Congress enacted the law in 1998.
In a complaint filed against the companies, the FTC and New York Attorney General allege that YouTube violated the COPPA Rule by collecting personal information - in the form of persistent identifiers that are used to track users across the Internet - from viewers of child-directed channels, without first notifying parents and getting their consent.
YouTube earned millions of dollars by using the identifiers, commonly known as cookies, to deliver targeted ads to viewers of these channels, according to the complaint.
"YouTube touted its popularity with children to prospective corporate clients," said FTC Chairman Joe Simons. "Yet when it came to complying with COPPA, the company refused to acknowledge that portions of its platform were clearly directed to kids. There's no excuse for YouTube's violations of the law."
In a blog post, YouTube said: "Starting in four months, we will treat data from anyone watching children's content on YouTube as coming from a child, regardless of the age of the user.
"This means that we will limit data collection and use on videos made for kids only to what is needed to support the operation of the service."
The COPPA Rule requires that child-directed websites and online services provide notice of their information practices and obtain parental consent prior to collecting personal information from children under 13.
In the complaint, the FTC and New York Attorney General allege that while YouTube claimed to be a general-audience site, some of YouTube's individual channels - such as those operated by toy companies - are child-directed and therefore must comply with COPPA.
Facebook was fined $5 billion last month by the FTC after a year-long investigation into the company's privacy violations following the Cambridge Analytica data scandal.
( With inputs from IANS )