The Dudley Muslim Association has offered Dudley Council £325,000 to drop court action in a dispute about the site where the mosque is to be built.
If accepted, the association would retain ownership of the land on Hall Street, and the council would not invoke its buy-back clause.
The council has so far incurred £213,000 in legal costs.
The land at the centre of the dispute was bought by the association 10 years ago, with the aim of replacing its current building on Castle Hill, which it said it had outgrown.
Proposals include a community and training centre, sports facilities and a two-storey car park, but the mosque itself and its three prayer halls have been the focus of opposition.
Branded at times a "mega mosque", the plans have attracted EDL supporters from across the country, although community leaders have in turn accused them of "scaremongering".
At its meeting on 25 June, the council's cabinet will refer the settlement offer to its scrutiny board for consideration.
Pete Lowe, leader of the council, said both the authority and the association were keen to avoid further costly legal disputes.
"We are carefully considering that offer in the interests of everyone concerned," he said.

Sweeney, 20, made 16 appearances for Rovers during a loan spell last season, while Telford, also 20, moved to Stoke from Blackpool in July 2015.
"I am now looking forward to playing in League One with Rovers and can't wait to get started," Telford said.
"I am really pleased to be coming back to Bristol Rovers," added Sweeney.
"I know that there were other clubs interested in taking me on loan, but once I knew that Rovers were interested there was only one club I wanted to join."
Sweeney was named as Young Player of the Year at Bristol Rovers last season.
Manager Darrell Clarke said: "I am looking forward to working with both of them as the season progresses and would like to thank Mark Cartwright and Mark Hughes at Stoke for allowing Ryan and Dominic to join us."
The Gas begin their season on Saturday with a trip to The Valley to face Charlton Athletic.
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The Scot's first game in charge was the encouraging 0-0 draw at Preston. But the Championship side have still not won in eight games, their worst run since the 2012-13 relegation season.
"One of the biggest differences is the work rate," said Bodvarsson.
"We're playing much faster and defending better," he told BBC WM.
"The message is much more clear now. A lot of the guys are taking it very positively.
"Paul Lambert has obviously come in with a plan. It is a clear message to all of the guys in the team about what their job is on the field now.
"Defensively, we were very good at Preston. Other than needing to be a little more clinical in the final third, I think we're improving a lot."
Iceland international Bodvarsson was one of previous boss Walter Zenga's first summer signings when he joined from German second-tier side Kaiserslautern.
Lambert's first home game in charge of 19th-placed Wolves is on Saturday against ninth-placed Sheffield Wednesday.
Wednesday have lost on their last five visits to Molineux, in a run of just two wins in 26 matches against Wolves.
Wolves' all-time leading scorer Steve Bull and fellow club legend Andy Thompson will make on-field appearances to mark the 30th anniversary of their moves to Wolves from neighbours West Bromwich Albion.
The club are expecting an attendance figure of 28,000, close to Molineux's 31,700 capacity, and comfortably their biggest crowd of the season.
An out of court settlement has been offered by a Muslim group to end a long-running dispute over a new mosque.
[NEXT_CONCEPT]
Bristol Rovers have signed defender Ryan Sweeney and striker Dominic Telford on season-long loan deals from Premier League side Stoke City.
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Wolves striker Jon Dadi Bodvarsson says they are already getting a much clearer "message" of how to improve under new boss Paul Lambert.