By Marty Graham

SAN DIEGO (Reuters) - A San Diego man who inherited from his father a 1974 aluminum penny valued at $2 million has surrendered it to the U.S. Mint to settle a lawsuit over ownership of the rare coin, a federal prosecutor said on Thursday.

Randall Lawrence, the son of a former Mint official, and Michael McConnell, the owner of a San Diego-area coin shop, sued the federal government in 2014 after it demanded the return of the penny.

Lawrence and McConnell had planned to display the coin at shows across the country and then sell it through an auction house, which estimated it would bring up to $2 million.

The pair turned it over to the Mint and relinquished all claims to ownership as part of a settlement, Laura Duffy, U.S. attorney for the Southern District of California, said in a statement.

The settlement "vindicates the government's position that items made at U.S. Mint facilities but not lawfully issued ... remain government property and are not souvenirs that government employees can merely remove and pass down to their heirs," Duffy said. She did not disclose further terms of the settlement.

The aluminum cent was proposed to the U.S. Congress in 1973, at a time when copper prices had increased dramatically, according to the Smithsonian Institution.

The Mint made about 1.6 million of the aluminum coins and distributed them to Congress in anticipation of approval. When lawmakers rejected it, the Mint reclaimed the aluminum cents and destroyed almost all of them, leaving one to the Smithsonian in Washington, where it remains.

Lawrence inherited one of the coins and a third aluminum penny turned up in the possession of a U.S. Capitol police officer, who said it was given to him by a member of Congress, according to the Professional Coin Grading Service website.

(Reporting by Marty Graham in San Diego; Editing by Dan Whitcomb and Peter Cooney)