Out of memory error while compiling the altia generated files using nios gcc compiler

That looks like the gcc program image is exceeding the available user address space - 2GB on 32bit windows.

Depending of the exact contents of the font files, changing the compiler options (maybe turn off the optimiser if they are only data) might help.

But you'll only hit the limit again later.

I think you need to work out how to compile the fonts in small groups.