The U.S. court of Appeals here refused yesterday to set aside a $4.98 million award to a Venice, Ill., man who was crippled during a dive into a hotel swimming pool here in 1971 when he was 18 years old.

In affirming the judgment against the Sheraton Park Hotel, the appellate court said there was no legal reason to set aside or reduce the award - probably the highest ever upheld in a personel injury case here, legal observers said.

A jury had originally awarded $7 million to the plaintiff and his family, but that sum was reduced by the trial judge to $4.68 million. The youth, Thomas Hooks, became a quadriplegic after he dived into the swimming pool.

Hooks attorneys successfully argued that the hotel had been negligent when it allowed a high performance aluminum diving board to be used at a pool used by amateurs such as Hooks. The jury found that the board propelled Hooks into swallow water, where he struck his head on the bottom.

The hotel contended on appeal that the judge's explanation of the hotel's duty to its guest was too strict, and that the jury that issued the award was a "runaway" jury motivated by passion and prejudice.

In addition, the hotel asserted that that the judge had not allowed certain evidence about the effect of income taxes on any award to be presented to the panel.