The Federal Trade Commission fined Google $136 million and the company will pay New York state $34 million to settle similar allegations.
The settlement is the largest in a case involving a 1998 federal law that bans the collection of information about children under age 13 without parental consent.
YouTube was accused of tracking viewers of children's channels without parental consent and delivered millions of dollars in targeted advertisements to those viewers.
"YouTube touted its popularity with children to prospective corporate clients," FTC Chairman Joe Simons said. "Yet when it came to complying with the law protecting children's privacy, the company refused to acknowledge that portions of the platform were clearly directed to kids."
In addition to paying the fines, the settlement calls for YouTube to revise its process of handling children's content.
"We will treat data from anyone watching children's content on YouTube as coming from a child, regardless of the age of the user," said YouTube CEO Susan Wojcicki. "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. We will also stop serving personalized ads on this content entirely."
The settlement, which pales in comparison to the $5 billion fine the FTC imposed on Facebook earlier this year for privacy violations, was approved by a 3-2 vote, with two Democratic commissioners calling for harsher penalties.
The agreement "repeats many of the same mistakes from the flawed Facebook settlement: no individual accountability, insufficient remedies to address the company's financial incentives, and a fine that still allows the company to profit from its lawbreaking," said Democratic Commissioner Rohit Chopra.
Chopra also noted it was the third time since 2011 that the FTC sanctioned Google for privacy violations.
The federal government has increasingly scrutinized large technology companies over the last two years, particularly with respect how they collect and use customers' personal information.
Many of the companies are also under antitrust investigations to determine if they have illegally stifled competition.