Reports of a feud between the two stars surfaced in May when Hilton made a jibe at Lohan's expense on her reality show The World According to Paris. Hilton later apologised for the remark, saying that it was "thoughtless and unnecessary".
However, TMZ reports that Lohan was recently seen attending a party at Hilton's beach house along with actors Emma Roberts and Lukas Haas.
"Everyone was so surprised when Lindsay walked in and we thought they didn't get along," said a source. "But they immediately gave each other a big hug."
Hilton was said to be "very excited" about her reunion with Lohan. "She loved seeing her again," the source said.
Lohan yesterday denied reports that she went on a drinking and partying binge last weekend, claiming that the story was "absurd".
The Mean Girls star was sentenced to 35 days of house arrest following her no contest plea to the purported theft of a $2,500 (£1,547) necklace. In late June, Lohan completed her sentence, admitting that she enjoyed the month-long stint because it afforded her some time away from the media.