BEIJING, Jan 4 (AP) -- In a landmark settlement, two Chinese paper companies and a government agency have agreed to pay 2.3 million yuan (US$285,000; €236,000) for polluting the Yellow River, one of China's most important water sources, a newspaper said Wednesday.

The settlement followed a lawsuit that reportedly was the first of its kind over polluting a Chinese waterway. It comes at a time when the government has begun to acknowledge the high environmental cost of China's breakneck economic growth.

A water company in Baotou, a city in the northern region of Inner Mongolia, sued after it was forced to stop using river water for 14 days in July due to pollution, the China Youth Daily newspaper said.

A court ordered the defendants to pay 2.8 million yuan (US$350,000; €290,000), the newspaper said. It said the defendants were appealing that ruling when they reached the settlement.

The defendants were two paper companies and a local waste water treatment bureau in Inner Mongolia, the newspaper said.

The three were accused of polluting a 400-kilometer (250-mile) stretch of the Yellow River, which flows across northern China and is a water source for dozens of cities and tens of millions of people.

The companies had dumped so much chemical sewage into a lake near the Yellow River that it threatened to overflow, the China Youth Daily said. It said that in order to reduce the water level, they pumped the effluent into the river.

Heavily polluting paper and chemical plants have long been cited as a key source of degradation of China's waterways, yet steps taken to rein them in have had little impact.

In a frank admission last month, the government said that some 300 million people in the countryside were drinking tainted water and vowed to make the issue a top priority.

Conflicts over water supplies have also led to violent clashes.

Last April, scores of people were injured in Zhejiang province, south of Shanghai, when police clashed with villagers who occupied an industrial complex that they said ruined crops by polluting water supplies.

The case also comes after recent chemical spills in the northeast and south of the country polluted water supplies for millions of people.