The Treasury Department, under pressure from U.S. contractors, has relaxed restrictions that would have barred American workers living in overseas construction camps from qualifying for a sizable tax break.

In revised regulations issued late Wednesday, the Internal Revenue Service liberalized its rules to extend the writeoff to virtually all U.S. construction workers living in dormitories or prefabricated houses abroad.

Perviously, the regulations had limited the tax break to cases in which workers' housing actually lacked basic facilities -- a standard the industry claimed was too stringent, particularly in the Middle East.

Industry lobbyists had protested that the previous IRS rulings were so stiff that they would cost American firms million of dollars in lost contracts and would worsen the nation's trade balance.

The controversy has been brewing for months. Treasury officials conceded last August they most likely had been too restrictive in drafting that portion of the regulation, but delayed formal changes until year-end.

The scrap is part of a bigger fight in which the construction industry is trying to undo a provision in the 1976 Tax Reform Act designed to crack down on abuses of the tax code by Americans living overseas.

The industry got Congress once to soften the impact of the 1976 provision, but lobbysists say they hope to push for a further relaxation in next year's session. Several hundred million dollars' worth of tax revenue is involved.

Yesterday's concession to the industry was intended in part to blunt criticism by Congress next year. It was in large measure because of drafting problems in the 1976 law that the industry was able to press its case to undo the act.

However, Robert Gants, director of the Tax Fairness Committee, a lobbying arm of the industry, criticized the new regulations as inadequate, branding them "confusing and less than satisfactory."

Gants charged in a prepared statement that the new rules "unintentionally make the case that it's virtually impossible to write, let alone enforce" restrictions of this kind.

"The truth is, we shouldn't have the law in the first place," he said.

Treasury officials said the relaxation would not affect estimates of the amount of new revenue the amended 1976 law would bring in, because the government "never really intended" to exclude that category of workers, from the break.

The crackdown on tax abuses of overseas Americans was only one of several "tax reform" provisions to be softened or repealed by Congress over the past few years. Some sections of the 1976 act have been undone entirely.

Just this past month, Congress voted to elimate or defer provisions that would have tightened the tax treatment of fringe benefits, mandated tax withholding for independent contractors and raised taxes on the sale of assets by heirs.