A child welfare agency and hospital in Pennsylvania have paid Elizabeth Mort $143,500 (Â£94,500) for the mistake.
Her three-day old daughter, Isabella, was removed from her for five days in April 2010.
The lawsuit argued that the opiate test in question had a far lower threshold than federal guidelines.
Jameson Hospital failed to inform Ms Mort that she had failed the test, then reported it to Lawrence County children and youth services without a secondary test.
"Elizabeth Mort never imagined that the last thing she ate before giving birth to her daughter - a poppy seed bagel - would lead to the loss of her newborn, but that is exactly what happened after the Jameson Health System failed to account for the possibility that her positive urine drug screen was due to her ingestion of poppy seeds," the lawsuit said.
Child welfare officials arrived the day after the family returned from hospital with an emergency protective custody order and took Isabella.
She was later returned after the agency could find no evidence Ms Mort had used illegal drugs.
The lawsuit, which was filed on her behalf by the American Civil Liberties Union (ACLU), was settled on Tuesday.
ACLU officials said Jameson had changed its policy to ensure newborns were not taken from parents solely on the basis of maternal drug test results.
"We hope that this case will encourage hospitals that routinely test pregnant women for drug use to reconsider that practice due to the harm that can result from false positives," said ACLU lawyer Sara Rose.
A US woman whose newborn was taken from her because she failed a hospital drug test after eating a poppy seed bagel has won a settlement, says her lawyer.