PALOS HEIGHTS, Ill., July 14 (AP) - A Muslim group that had planned to turn a suburban Chicago church into a mosque has decided to accept $200,000 from the city to walk away from the deal, officials representing the Al Salam Mosque Foundation said Friday.

The City Council voted last month to pay the money if the Muslim group would abandon its plan to buy the old Reformed Church of Palos Heights. Aldermen insist they want to use the church, which has been for sale for more than two years, an an annex for the city's recreation center, and say religion has nothing to do with the deal.

Rouhy Shalabi, the foundation's attorney, initially said he would recommend that the foundation reject the offer. But he now says the group would rather remove itself from the politically charged debate and allow the recreation plan to go forward.

``We're trying to make the best out of an impossible situation and move on,'' Shalabi said Friday before a special city council. ``Our people want to be able to worship in peace ... and without fear of stigma.''

Mayor Dean Koldenhoven, who has threatened to veto the $200,000 offer, has until Tuesday to do so. He continued to call the offer ``embarrassing'' in light of anti-Muslim comments made at a previous meeting.

Others said it was Koldenhoven who caused an embarrassing spotlight to be put on the mostly white, middle-class suburb of about 12,000 people.

``He's the one who says 'You are bigots,''' yelled Alderman Frank Passarelli, pointing at Koldenhoven. ``He's to blame.''

Alderman Jim Murphy apologized for a derogatory comment he made about Muslims. But he, Passarelli and at least two other city council members who voted to make the offer stood by their contention that religion has nothing to do with it.

Nearly 20 people addressed the council - with about two-thirds of them saying they did not support the $200,000 payment.

One Muslim attorney from nearby Oak Lawn scolded the foundation for accepting the city's offer.

``Shame on you! You should never accept that offer,'' said Omar Najib, who represents the Arab-American Anti-Discrimination Committee. ``We are not for sale.''

Resident Alice Stanley said she had heard rumblings that a mosque would hurt property values in the mostly white, middle-class suburb that has about 20 Christian churches and no mosques.

``In my mind, the thing that's brought down property values is the ignorance,'' she said.

Some residents took offense to such comments.

``We are honorable, and we're doing the right thing for our community,'' resident Jane Hurley said.

If Koldenhoven vetoes the $200,000 offer, Shalabi said he may have no choice but to take the city to court.

Many of the town's 450 Muslim families attend an overflowing mosque in Bridgeview, a few miles to the north. Shalabi said the foundation would consider finding another site in Palos Heights but may have to go elsewhere since vacant parcels of land are rare.

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