The District's Redevelopment Land Agency approved a plan yesterday to pay off its longstanding urban renewal debts to the federal government in hopes the city can receive up to $4.2 million in federal housing funds.

During the past seven years, the District government has lost $40 million in federal funds that could have been spent to improve housing for low- and moderate-income families because the money went instead to repay hefty urban renewal debts incurred when the District purchased land in the city's central core for redevelopment.

The District lost the money because the federal government held back 20 percent of the city's yearly Community Development block grant allocation to help pay off the principal and interest on its urban renewal debts. Those debts once were as high as $100 million, city officials said.

City officials said the debts mounted because the District government was slow in selling off or leasing its most profitable downtown urban renewal property.

The District, one of 10 cities with outstanding urban renewal debts, according to the U.S. Department of Housing and Urban Development, owes $10.1 million, which is due in July.

None of the $10.1 million will come from city tax dollars, city officials said. Instead, the debt will be paid from a variety of sources: $4.1 million will come from payments from developers who lease urban renewal property; $238,754 left from last year when the federal government held money back and a $5.7 million federal urban renewal grant that has not been distributed to the city. The city was not allowed to collect that money until it was ready to retire the total debt, city officials said.

Federal officials held back $4.2 million this year but because the city plans to use other money to retire the debt, that money should be returned, city officials said yesterday.

The repayment plan now goes to the D.C. City Council for approval.

The debt retirement will also give the city a free hand in disposing of its remaining urban renewal lands, including Metro Center and the Portal site in Southwest. All dispositions are now subject to HUD review and approval.

"They could second guess anything we do," housing director James E. Clay said yesterday. "We will get a lot more flexibility in the urban renewal program," Clay said.

But the federal controls on the kind of developments allowed in completed urban renewal areas such as Southwest will remain in effect, Clay said.

In other action yesterday, the urban renewal agency also postponed its scheduled vote on selling Metro Center in downtown Washington until May 17 to receive additional information about the deal.

Meanwhile, it was learned yesterday that the downtown urban renewal plan does not allow the Hecht Co. to build a department store at Metro Center. A new Hecht Co. store is the centerpiece of the Metro Center development.

Although a department store has been part of the Metro Center plans for five years, the city two weeks ago asked the National Capital Planning Commission to change the downtown urban renewal plan to specifically allow for a department store.

The NCPC is scheduled to vote on the plan changes Thursday.