The city of Richmond will pay a group that wants to build a Hilton hotel there more than $2.5 million and will commit loans of up to $4.5 million to settle a city lawsuit blocking the hotel, United Press International has reported.

Terms of the out-of-court agreement were announced last week. The city had filed suit to block Richmond Hilton Associates from building the hotel because officials believed it would interfere with a downtown development called Project One.

Richmond Mayor Roy West said the money involved in the settlement eventually would be offset through taxes on the projects the associates are planning to build with the $4.5 million in loans.

"We're very pleased with the settlement negotiation that's taken place," said James Bristow, a principal partner in Richmond Hilton Associates. "We feel confident that we can take the proceeds from our settlement here and reinvest into the city."

The first payment of $1 million, due July 1, will come from the city operating budget's 1983-84 unappropriated reserve of about $2 million, West said. The city has already paid about $900,000 in legal fees in its court battle against the hotel.

West said the city council will soon repeal the ordinance giving preference to Project One developments, which was used to block the Hilton project.