BALTIMORE (AP) _ The city will repay the U.S. Department of Education $3.75 million to settle a longstanding dispute over the Baltimore school system's use of federal funds to help disadvantaged students.

The amount of the settlement, approved Wednesday by the city Board of Estimates, represents about a third of the $10.9 million that federal officials had originally sought to recover.

Under the agreement, about 75 percent of the $3.75 million could be returned to the city in the way of funding for new programs. Under such an arrangement, cost of settlement could be as low as $937,000, said Harold R. Tall, acting city finance director.

''I think it's a really good settlement for the city,'' said C. Judson Porter, the school system's finance officer. ''We had trouble living with some very technical requirements that are very difficult to abide by'' in a large urban school system.

The dispute dates back to 1981 when federal auditors found problems in the distribution of funds between 1974 and 1978 in the city school system's Title I program.

Title I, which was replaced by Chapter I, was aimed at improving educational opportunities for low-income children who are doing poorly in school.

School systems across the country had trouble adhering to a requirement that they equitably distribute state and local money among their schools, then use Title I funds to supplement their educational programs, said Allan L. Reynolds, city auditor and former auditor for the federal education department.

A school system that did not have an appropriate level of local funding stood to lose its Title I money.

The bulk of the $10.9 million claim against Baltimore involved the funding distribution requirement. The remainder involved allegations that city schools were not using Title I money solely for children targeted for federal aid.