Buckingham Palace's announcement on Saturday follows more than a week of intense private talks aimed at managing the consequences of the couple's shocking decision to relinquish real frontline obligations.
The decision means that the couple will stop using the titles "royal highness" as they assume more common lives that will see them spend more time away from Britain and the royal family.
"After many months of recent conversations and discussions, I am pleased that together we found a constructive and supportive path for my grandson and his family," said Queen Elizabeth II in a statement.
"I recognize the challenges they have faced as a result of intense scrutiny over the past two years and I support the desire for a more independent life."
His comments referred to battles with the media that led Harry and Meghan – known until now as Duke and Duchess of Sussex – to sue several newspapers for trespassing on their private lives.
A separate statement attributed to Buckingham Palace said that "the Sussex will not use their HRH titles as they are no longer members of the Royal Family".
HRH represents His Royal Highness.
“As agreed in this new arrangement, they understand that they are required to depart from real duties, including official military commitments. They will no longer receive public funds for their royal duties, ”says the statement.
The agreement added that the two will also pay 2.4 million pounds ($ 3.1 million) of taxpayers' money spent on renovating their home in Frogmore Cottage, near Windsor Castle.
– "New progressive role" –
The Palace declined to comment on who ends up paying for their security details in Canada – a matter of intense public debate.
Nor did he mention whether the couple could benefit financially from future royalties and franchise fees.
Harry and Meghan are trying to register the brand "Sussex Royal" as a global trademark for their future companies.
The couple is dedicated to environmental causes and seeks to develop their charitable foundation as part of a "new progressive role".
The queen's announcement is the second in the real crisis – dubbed Megxit after Britain's painful battle over Brexit – since Harry and Meghan's effective resignation on March 8.
"We chose to make the transition this year, starting to play a new progressive role within this institution," said the couple at the time.
"Now we plan to balance our time between the UK and North America."
Meghan then returned to Canada and is now there with her son Archie.
His ad took the royal family by surprise and created a media sensation in Britain and around the world.
His treatment of the London tabloid press and his personal future – as well as questions about long-standing real traditions – became daily news on the front page.
Media reports said Harry was likely to join Meghan and Archie on Canada's west coast next week.
– & # 39; Abdication & # 39; –
The queen's final decision on her grandson's future drew immediate comparisons to the abdication of King Edward VIII in 1936.
Edward married American socialite Wallis Simpson the following year and never returned to Britain.
"Harry is not the king (he is the sixth in line), but today it looks like Meghan's abdication," said ITV royal editor Chris Ship on Twitter.
"This is not 1936. But it is still very big."
BBC royal correspondent Nicholas Witchell said Meghan must also decide whether to return and spend time in Britain to gain British citizenship.
The couple's future tax status also remains uncertain.
"I think they are getting into this as much as anyone else," said Witchell.
The couple will now be officially known formally as "Harry, the Duke of Sussex" and "Meghan, the Duchess of Sussex".
The Palace statement said the new agreement "will take effect in the spring of 2020".