NEW YORK (AP) _ Manufacturers Hanover Corp. plans to sell its consumer finance unit for $685 million in cash to a unit of American General Corp., a Texas-based financial service concern, it was announced Monday.

The companies said they reached an agreement in principle on the sale of Manufacturers Hanover Consumer Services Inc. in a deal that would nearly double the size of American General's consumer credit finance operations.

Completion of the transaction is subject to reaching a definitive agreement and approval by the boards of Manufacturers Hanover and American General.

The Houston-based American General would make the acquisition through its Credithrift Financial Corp., which has headquarters in Evansville, Ind.

The purchase would boost Credithrift's assets to more than $6 billion from $3.3 billion and give it a total of 1,400 branch offices in 42 states, Puerto Rico and the Virgin Islands.

Both Credithrift and Manufacturers Hanover Consumer Services market consumer and home equity loans and retail financing services, and have insurance subsidiaries that provide credit-related coverage.

Manufacturers Hanover's decision to sell its consumer finance unit, which is based in Huntingdon Valley, Pa., came as no surprise as it tries to recover from heavy losses absorbed last year when it boosted its loan loss reserve.

The nation's sixth largest bank holding company lost $1.14 billion in 1987 as it boosted its loan-loss reserve by $1.7 billion in anticipation of problems with collecting on some Third World debt.

Manufacturers Hanover said from its New York headquarters that the proposed sale would result in a pre-tax gain of about $300 million.

''We are realizing a substantial premium over book value on this well- managed company,'' said John F. McGillicuddy, chairman and chief executive of Manufacturers Hanover.

Manufacturers Hanover's common stock rose 12 1/2 cents to $26 a share and American General was off 50 cents a share to $32.50 on the New York Stock Exchange.

Lawrence Cohn, who follows the banking business for Merrill Lynch & Co., said Manufacturers Hanover appeared to have gotten ''a good price'' for the unit and that the sale should not hurt its overall profitability.

Manufacturers Hanover said the consumer finance unit earned $55.2 million in 1987. Cohn said the company should be able to earn that much in interest on the proceeds from the sale.

In addition, Cohn said the sale will help Manufacturers Hanover toward its stated goal of boosting the ratio between shareholder's equity and its assets, a key indicator monitored by federal regulators.

Manufacturers Hanover had told shareholders earlier this year that it intended to boost that ratio to 4 percent by the end of 1988 through a combination of stronger operating earnings, $400 million in pre-tax gains on the sale of undervalued assets and use of tax benefits.

Manufacturers Hanover said the consumer finance sale would add about $275 million to shareholders' equity and reduce total assets by about $3 billion from $73.3 billion at the end of 1987.

Cohn figured the sale would boost the equity-to-assets ratio to about 3.32 percent from 2.81 percent at the end of 1987.

American General posted a profit of $555 million in 1987 and had $28 billion in assets. Its Credithrift subsidiary earned $68.9 million in 1987.

Harold S. Hook, chairman and chief executive of American General, said the purchase should not dilute American General's earnings and that there were no plans to alter the company's previously announced stock repurchase plan.

American General said it would change the name of its consumer credit segment to American General Financial Services upon completion of the deal.

In addition to the sale price, Manufacturers Hanover said it would also receive a cash dividend of $20 million representing the consumer finance unit's earnings between Jan. 1 and the closing of the transaction.

Despite the proposed sale, Manufacturers Hanover said it would remain a strong player in the consumer market through its Branch Banking Division, a New York area regional bank, and its nationwide credit card operation.