Harvard agreed yesterday to pay the federal government $26.5 million to resolve a civil lawsuit in which the Justice Department alleged that two of the school’s employees diverted and wasted federal funds while providing economic advice to the Russian government.

The settlement ends the Justice Department’s eight-year investigation of a Harvard project to assist the government of Russia’s first president, Boris Yeltsin, during the former communist country’s rocky transition to a free-market economy. In 1992, the university received a $50 million grant from the federal Agency for International Development to conduct the project.

According to the federal lawsuit, a Harvard economist, Andrei Shleifer, and a lawyer employed by the university, Jonathan Hay, failed to disclose several of their own six-figure investments in Russian firms and government bonds, even though their work with Yeltsin administration officials could have affected the value of those financial holdings.

Mr. Shleifer, now a tenured professor in the school’s economics department, will pay $2 million under the terms of yesterday’s agreement. Mr. Hay, who is now an associate in the London office of the law firm Cleary Gottlieb Steen & Hamilton, will pay between $1 million and $2 million, depending on his earnings over the next decade.

A spokesman for Harvard’s Faculty of Arts and Sciences, the division of the university in which Mr. Shleifer teaches, would not say whether Mr. Shleifer will face any disciplinary measures. “Consistent with its practices, the FAS is not in a position to comment on any internal personnel matter involving a member of its faculty,” the spokesman, Robert Mitchell, told The New York Sun. Spokeswomen for Cleary Gottlieb did not return repeated requests for comment about the settlement involving Mr. Hay.

An assistant attorney general, Peter Kessler, said in a statement yesterday: “Improper use of federal grant programs for the purpose of self-enrichment will not be tolerated.”

Harvard itself never stood to benefit financially from the breach of its contract with the federal government, according to the school’s vice president and general counsel, Robert Iuliano. While federal prosecutors initially argued that Harvard had committed intentional fraud, a federal district court judge absolved the university of those charges last June.

“We admit no liability,” a university spokesman, John Longbrake, told the Sun.

Mr. Shleifer also said in a statement yesterday that he had decided to settle the lawsuit “without any admission of liability on my part.”

Mr. Shleifer’s lawyer, Martin Murphy of the Boston-based firm Foley Hoag, said the government’s eight-year investigation had found “no evidence” that Mr. Shleifer had sought personal financial gain.

While Mr. Shleifer maintains he could have prevailed if the suit had gone to trial, he said: “My lawyers told me my legal fees would exceed the amount that I will be paying the government.”

The federal lawsuit, filed in 2000, came shortly after the Russian-born Mr. Shleifer won the prestigious John Bates Clark Medal, awarded every two years by the American Economics Association to the person under the age of 40 who has made the most significant contribution to the field.

According to his lawyer, Mr. Shleifer was motivated to serve as an adviser to the Yeltsin government because of his genuine concern for the welfare of his native country. Federal prosecutors argued that the misconduct of Messrs. Hay and Shleifer damaged relations between America and Russia.

Harvard could have faced up to $34 million in penalties if the case had gone to trial, and federal prosecutors could have sought as much as $102 million from Messrs. Hay and Shleifer.

In a settlement with the Justice Department last year, the Cambridge based investment firm FFIA, which is run by Mr. Shleifer’s wife, agreed to pay $1.5 million to resolve a lawsuit alleging the firm used federal resources to start a bond-trading company as part of a scheme to evade taxes that Russia imposes on foreigners.