SANTIAGO, Chile (AP) _ The government has ordered the dismantling of a settlement of Germans, saying it is trying to operate as ''a state within another state.''

Civilian President Patricio Aylwin, who took over in March from Gen. Augusto Pinochet, ordered an investigation of the colony as one of his first acts in office. But no report was made public.

In the past, military opponents have said the settlement was the site of a clandestine prison for Pinochet's foes during his 17-year rule.

Fidel Reyes, an attorney for the colony, said the settlers will appeal Friday's government decision. He said the order stems from ''political hatred'' of German Foreign Minister Hans Dietrich Genscher, but he did not elaborate.

About 300 Germans live and farm in the 29-year-old isolated colony, known as Colonia Dignidad or Dignity Colony, about 200 miles south of Santiago in the Andean mountains. They have also built a hospital and school for Chileans.

Witnesses say Colonia Dignidad is a modern farming area of about 30,000 acres. Settlement leaders received $250,000 from the government annually to run the hospital and school, officials said.

News media have claimed that Nazis were living there. But government rights advocates visited the colony last year and made no public statement afterward about any Nazis.

In its decision Friday, the government annulled the decree authorizing the settlement.

''The cancellation ... puts an end to an enclave that during 29 years has pretended to become a state within another state, giving its members a system of life completely outside our Western, Christian conception of family,'' Vice Minister of Interior Belisario Velasco told reporters.

''This colony additionally avoided conforming to laws that rule all the inhabitants of the republic,'' he said.

Minister of Justice Francisco Cumplido said properties of Colonia Dignidad would be transferred to a Methodist corporation. He did not identify it or give details about what would happen to the settlement's residents.

Minister of Interior Enrique Krauss said Germany's government has been informed about the dissolution of Colonia Dignidad. There was no immediate report of comment by German officials.