The Alton (Ill.) Telegraph has reached a tentative settlement of the $9.2 million libel judgment that threatened to put the paper out of business.

The libel award, won in 1980 by an East St. Louis building contractor, attracted national attention because it was believed to be the largest ever against a newspaper and because it stemmed not from a published story but from an unpublished memorandum written by two reporters.

Neither side in the case would disclose the terms of the proposed settlement but editor Stephen A. Cousley said he believed it would save the paper.

The reporters, investigating organized crime in 1969, received an unverified tip that the contractor, James C. Green, had ties with organized crime figures. The reporters never established any connection and the paper never ran a story, but the reporters passed it on in a memo to the head of a federal organized crime strike force. It found its way to the Federal Home Loan Bank Board, a regulatory agency that began an investigation of the savings and loan company where Green got his loans.

Though no charges were filed, the institution cut off Green's credit and he lost his business.

Green sued the Telegraph and won the $9.2 million award (including $2.5 million in punitive damages) after a jury trial.

The Telegraph has a net worth of about $2.5 million and immediately filed for bankruptcy pending appeal.

The bankruptcy proceeding was under way when the tentative settlement was reached last week. One of the options being considered by the bankruptcy judge was to turn the paper over to Green.

The case raised the issue of the right of citizens generally to inform law enforcement authorities of alleged wrongdoing without fear of libel or slander suits as well as a controversy about the size of awards in recent libel cases.

Cousley and Rex Carr, Green's lawyer, said they believed the settlement would become final after the ironing out of details and approval by the courts.

Carr said the payment would be sufficient to pay all Green's debts and "put him back in business."

Cousley said even under the reduced sum his family's paper would be severely weakened financially.

But he indicated that he and his lawyers nevertheless thought it was safer to settle than continue the appeal, especially after an Illinois appellate court declined recently to consider the appeal and sent it to the federal bankruptcy court.

"Sometimes the pursuit of ideals is dampened by the realities," Cousley said.