Is there a way to delete custom settings, We are changing the custom setting to a custom object with the same API name but it was not an issue in UAT and Development Org. But seems couldn't delete the custom setting in managed package Org so that we can create custom object.
Deleting the custom setting will not help you. A name in a given component area (e.g. a CustomObject or ApexClass) can never be reused. Once you upload a component, if you then delete the item, that name will never be available again. In order to delete custom settings and custom objects, you must first create a ticket in the Partner Portal requesting the ability to delete restricted objects for this package. The only way you can get around this would be to rollback all versions that have this custom object back to Beta, which you can only do if no version since then has been installed in any other org, or if you can uninstall all those version from all orgs where the version is installed. This is intentionally troublesome because it maintains the integrity of subscribers' data and metadata.
Given the platform's limitations, we usually change the label to have "(Deprecated)" appended to signal to users that the feature is no longer relevant. Or you could choose a stronger word.