Ethel Jane Redd, whose leg was mangled when she was struck and dragged by a truck on K Street NW last year, yesterday reached a settlement worth $16 million in her lawsuit against the owner of the truck and the company that hired and employed the driver.

The settlement, believed to be the largest ever paid here, was disclosed by Redd's attorney, Roger C. Johnson. Under its terms, the insurers of Product Development Corp. will pay Redd on behalf of their client and the company that leased the truck to Product Development Corp. The case had been scheduled to go to trial Monday.

Redd, 34, will receive about a third of the money immediately as a lump-sum cash payment, and then will receive annual payments "in six figures" that will increase by 3 percent a year, along with smaller lump-sum payments every five years, Johnson said.

Johnson said he believes the settlement is the result of evidence that he said showed a pattern of drug and alcohol abuse by the truck driver, Jerome D. Greene, and other drivers working out of the company's Alexandria location.

Former employees of Product Development Corp., a California-based company that delivers telephone books under contract with regional Bell companies, testified that Greene regularly drank on the job and that supervisors knew or should have known about it.

Johnson said depositions from company officials and a review of the firm's practices indicated that when the company hired Greene, it did not comply with Federal Highway Administration regulations that would have revealed Greene's criminal and driving records. Those records included more than 70 notices of suspension in New York.

An official of Product Development Corp. referred questions about the case to an attorney for the company, who could not be reached for comment.

Greene's main assistant on the job, Lee Brown, said in a deposition that on the day of the accident, Feb. 17, 1989, Greene, Brown and two helpers had delivered no phone books and instead had spent much of the day riding around Washington.

Brown said Greene stopped at a liquor store to buy a pint of vodka, which he and Greene drank with orange juice. Greene then purchased another pint of vodka and waited while the two young helpers tried to cash their paychecks.

Suddenly, Brown testified, Greene decided to drive downtown to see his wife, leaving without the two helpers and driving erratically.

Brown said he jumped out as Greene drove up on the sidewalk along K Street. Greene later rammed more than a dozen cars, knocked down street lights and newspaper boxes, and finally hit and dragged Redd near 16th and K streets.

Greene pleaded guilty in August to three felonies and a misdemeanor, and is serving a prison term of 13 years and 10 months to life.

Redd, who was in Johnson's office to sign settlement papers and to deposit the first checks, said little about the settlement. She was more interested in talking about her graduation last week, in which she received her general education degree 18 years after dropping out of 12th grade.

Redd scored among the top 10 grades on the test and won a $1,000 scholarship from the city.

Most of the skin and muscle of Redd's left leg were stripped away as she was dragged along 16th Street.

Most of her knee has been removed.

A portion of her right hip was fashioned to hold together the major bones of her leg, which was fused permanently straight. A metal apparatus to hold the bones in place completely encircles her leg from mid-thigh to mid-calf.

Only now is the compound fracture of her left thigh beginning to show new growth, an indication that the bones are healing.