Wikipedia founder Jimmy Wales has called for a review of Anglo-US extradition arrangements after a legal agreement struck by Sheffield Hallam student Richard O'Dwyer to avoid extradition to America on copyright charges.

Wales, who launched a campaign with the Guardian against O'Dwyer's extradition that garnered more than 250,000 signatures, welcomed a settlement announced in the high court on Wednesday morning, and called for reform to prevent similar cases in future.

"This is very exciting news, and I'm pleased to hear it," he said. "What needs to happen next is a serious reconsideration of the UK extradition treaty that would allow this sort of nonsense in the first place."

O'Dwyer faced up to 10 years in prison in the US over copyright charges relating a website he set up, TVShack.net, which allowed users to share links to free places to watch TV and movies.

On Wednesday, the high court was told O'Dwyer's legal team and the American prosecutors had agreed a draft "deferred prosecution" in the past two days, which requires him to travel to the US and pay a small sum in compensation.

It is understood that the deal will be concluded by Christmas at the latest, and O'Dwyer may fly out to the US as early as next week. Under the terms of the agreement, O'Dwyer will not only avoid a trial and criminal record, but will also then be free to travel internationally. If the UK had merely refused extradition, O'Dwyer would have been at risk of extradition from any foreign country he visited.

O'Dwyer's mother, Julia, who has campaigned relentlessly for her son, said she could not believe the case had turned out "so well".

"I didn't know this was going to happen today – I'm at work! I read a comment on Twitter with someone reporting what the judge had said and just burst into tears," she said.

"It's been a fraught few days waiting for them: they were delayed on the US side, because all the offices are in New York and it was all due to the hurricane [Sandy] that hit them. It's a bit of a relief – I can't believe it really, that it's turned out like this, so well. I don't know what I'm going to do with myself."

She had not yet heard from her son, who was in classes, but added that after the outburst of online support: "We've got hundreds of thousands of 'thank yous' to be saying."

The deal brings resolution to a case that has attracted widespread criticism around the world and particularly in Britain, where the authorities pursued no charges against O'Dwyer and MPs of all parties urged the home secretary to halt the extradition.

More than 253,000 people signed Wales's petition calling on the home secretary, Theresa May, to block O'Dwyer's extradition to the US on charges that might have carried a sentence of up to 10 years in jail.

In spite of the outcry, May insisted she would not back down from her approval of the extradition, given earlier this year, saying in July that the decision had "already been taken" and that O'Dwyer had to rely on his appeal.

The decision proved highly unpopular in Britain, with a YouGov poll finding 46% believed O'Dwyer should not be prosecuted at all, and only 9% thought he should be sent to the US for trial.

On Wednesday, Dominic Raab, a Tory MP who supported the campaign to halt O'Dwyer's extradition, welcomed the agreement but echoed Wales's call for reform of the extradition law.

"This is a victory for Richard and his family, a victory for British justice, and a victory for common sense," he said. "Now we need to put in law a proper safeguard to prevent these arbitrary cases from happening again. We shouldn't be subjecting British citizens to rough justice under our blunt extradition regime."

Isabella Sankey, of the human rights campaign group Liberty, said: "This will be a huge relief for Richard – but how appalling that he had to wait so long for the US authorities to make this decision.

"Case after case shows that our extradition arrangements must be overhauled to allow people who have never left these shores to be dealt with here at home. We need urgent legislation to prevent their torment."

Speaking at the high court on Wednesday, Sir John Thomas, president of the Queen's Bench Division and the third most senior judge in England and Wales, said the deal was a "very satisfactory outcome" to the long-running case.

O'Dwyer's extradition application is due to return to the high court in 15 days to be formally disposed of. He is meanwhile expected to go to the US and fulfil the terms of the agreement, which, as well as payment, demand undertakings not to infringe copyright laws again.

Thomas added: "It would be very nice for everyone if this was resolved happily before Christmas."

O'Dwyer, who set up TVShack in 2007 at the age of 19, was arrested on allegations of copyright infringement in 2010. A criminal investigation in the UK was dropped soon afterwards. But the US Immigration and Customs Enforcement Agency shut down the website claiming he had earned more than $230,000 (£147,000) in advertising revenue from it – and the US launched a request for his extradition.

In an interview with the Guardian in June, O'Dwyer said the US authorities were trying to use him as a test case. "I think they're trying to use my website as a sort of guinea pig to try to scare everyone else making linking websites," he said.