Washington's urban renewal agency yesterday agreed to sell the city a $1.1 million lot at 14th and U streets NW for a new municipal office building that officials hope will stimulate private investment in the riot-scarred area.

The D.C. Redevelopment Land Agency's vote to sell the 2.2 acre tract was the last major hurdle for the city's plans to construct a $41.8 million eight-story office building on the site where the 1968 civil disturbances began. The corner is now one of the city's most notorious for crime and drug trafficking.

"The mayor is very pleased with the RLA," spokeswoman Annette Samuels said.

"This was the last step needed in order for the city to move forward and build the municipal building in that area."

Construction of the new building, which will contain two levels of underground parking for 394 cars, will allow the city to bring together some of its agencies, now scattered around town in 1.7 million square feet of leased space. The new building will contain 456,000 square feet of office space.

Several small businessmen whose firms are located on the office building site have already been notified they will have to move. The city is required to help with their relocation and in some instances compensate them for some of their relocation expenses.

Unlike some urban renewal projects which have languished for years, the city office building has moved through the RLA process rapidly.

Mayor Marion Barry first announced the project in June, after city officials scuttled longstanding plans to put the building at Third and E streets NW.

Also at yesterday's meeting RLA heard plans from a group of developers who want to renovate the Riggs Bank Building at the northern end of the 14th Street riot corridor, add two additional floors to the building and convert all but the ground floor into 150 federally subsidized apartments for the elderly.

"This should be a strong catalyst for the rest of the development," said attorney Robert Jeffers, representing a partnership composed of the Winn Development Co. of Boston and the local Temple Church of God in Christ headed by Bishop Samuel Kelsey.

The group was granted the redevelopment rights to several parcels of city-owned land at 14th Street and Park Road two years ago, but the projects has been delayed because of complications with routing the Metro Green Line, which will go under some of the property, and because of historic preservation questions surrounding the Tivoli Theatre, located on one of the parcels.

Of the three major city corridors damaged in 1968, 14th Street, the city's busiest shopping area outside of downtown before the riots, has received the most attention. Nearly 1,000 units of new housing have been built or renovated, all of it federally subsidized, and some small new businesses have opened.