Developers of Potomac Greens, a $500 million office project planned for a site along the George Washington Memorial Parkway, yesterday withdrew a $50 million federal lawsuit against Alexandria that had challenged the city's rejection of the project.

City officials welcomed the move as an indication that the developers, Savage/Fogarty Cos. Inc. and the Richmond, Fredericksburg & Potomac Railroad, intend to reduce the size of the project in order to meet city concerns about traffic.

Mayor James P. Moran Jr. called the suit's withdrawal "a good-faith effort by the developers to cooperate with the city."

City Attorney Philip Sunderland said: "It is my understanding that the developers' decision to dismiss their suit is prompted by their desire to move away from the site plan project they pursued before City Council last spring and to come forward with a new mixed-use . . . proposal at some time in the future."

The developers could not be reached for comment. Their attorney, Thomas F. Farrell, said the withdrawal was an indication that they wished to reestablish a "good relationship" with city officials.

Farrell declined to say what type of project the developers would offer for the 38-acre site in the RF&P railroad yard just north of the city's Old Town section. "We're in the process of considering our options," Farrell said, adding that "all {options} involve development of the site."

Moran said the withdrawal of the suit followed a series of meetings last week between top officers of Savage/Fogarty and city officials, including himself and members of the City Council.

Savage/Fogarty officials, including its chairman, Julien G. Redele, "wanted to know what it would take for the city to agree to a plan for Potomac Greens," Moran said.

The mayor said he told the developers that if they agree to pay the full cost of building a Metro station at the site, develop an "acceptable" traffic management control plan and devote "at least one-third" of the project to residential use, "then we would be willing to consider their application."

"They wanted a nod and we gave them nothing; we didn't budge," Moran said. "But they still dropped" the lawsuit.

The developers' plans originallyincluded a Metro stop, a 300-room hotel, 300 condominium units, shops and office buildings. City officials and residents fought the plan because of concerns about traffic.

Angered at the delay, the developers withdrew this plan and submitted another eliminating residential uses and the Metro stop and calling for 16 buildings with 2.4 million square feet of office space.

The Planning Commission rejected that design and was upheld by the County Council.