A Sunday newspaper reported the 18 foreign hostages kidnapped in Lebanon are being held in a former school in south Beirut, and it carried a front-page photograph of a building it said was the school.

The Mail on Sunday said the hostages, including nine Americans and three Britons, were taken there during recent fighting in the area between gunmen of the pro-Iranian Hezbollah organization and Shiite Amal militiamen.Hezbollah, or Party of God, is believed holding the captives.

The Mail on Sunday attributed its report to Amal officers it did not identify.

In other developments:

- London's Guardian newspaper said the United States is directly talking with Hezbollah leaders in Lebanon and with Iranian representatives in Geneva in another effort to gain the release of the hostages. It based its report on information from unidentified political sources in Beirut.

- The British Foreign Office said Saturday it has proposed paying Iran the equivalent of more than $3.2 million as compensation in a settlement over damages to British diplomatic buildings in Iran and Iran's Embassy in London.

A Foreign Office spokesman, who was not identified in line with government practice, said the proposal is to be discussed at a meeting in London starting Wednesday but the talks will not cover the question of the British hostages in Lebanon.

Of the nine American captives, Terry Anderson, chief Middle East correspondent for The Associated Press, has been held the longest. He was kidnapped March 16, 1985.