In a major political victory for American Telephone & Telegraph Co., Rep. Timothy Wirth (D-Colo.), unexpectedly announced yesterday that he will abandon his drive to toughen the historic agreement between AT&T and the Reagan administration to break up the Bell System.

Wirth, the chairman of the House telecommunications subcommittee and AT&T's chief congressional opponent, said he had been beaten by a "campaign of fear and distortion" by AT&T, which had spent $2 million to lobby against his proposed bill. Wirth said he had given up any hope of getting any legislation passed this year unless it was "dictated by AT&T."

Yet, Wirth said, "the only terms that AT&T will accept . . . are completely inadequate, selfserving, and not in the best interests of the ratepayers of this country."

Wirth's action now puts the fate of the landmark settlement agreement in the hands of U.S. District Judge Harold H. Greene, who must approve AT&T's plan to divest itself of its 22 local operating companies. A decision from Greene is expected shortly.

Ever since the settlement between AT&T and the Justice Department was signed on Jan. 8, Wirth has been pressing for legislation that would impose stricter terms on the Bell System, charging that the settlement did not adequately protect telephone customers from sharply higher rates.

His legislation would have imposed tighter restrictions on AT&T's long-distance division, which, under the settlement, would continue to operate as a division of the Bell System. Wirth's legislation would put the division into a separate subsidiary that would be tightly regulated by the Federal Communications Commission. It also would have barred AT&T from entering the electronic publishing business over any facility it owned or controlled. At the same time, the legislation would have given the local operating companies greater opportunities to enter the telecommunications business than the settlement permits.

Despite considerable lobbying from AT&T--including a massive letter writing campaign by its 3 million shareholders and 1 million employes--against the bill, Wirth had built up substantial support for his legislation. As chairman of the House energy and commerce telecommunications subcommittee, Wirth won unanimous support for his bill from his subcommittee and remained confident that he had the votes in the full committee for the measure.

However, as the measure was being considered before the House Energy and Commerce Committee over the past month, supporters of AT&T employed a variety of stalling tactics to delay the measure so Congress would have no time to consider it this session. AT&T has long argued that no legislation was needed until the settlement was approved by the judge.

After a 5-hour meeting between his staff and AT&T officials yesterday in an ongoing attempt to compromise, Wirth finally decided late last night to give up. Committee sources said the decision was made after it became clear that AT&T was not about to budge on any of the principles Wirth considered fundamental and that its supporters had more than a hundred amendments to the bill to delay its consideration.

Wirth announced his decision immediately after the committee convened yesterday morning, reading a prepared 3-page statement. The committee adjourned immediately after Wirth's statement and the congressman was unavailable for comment.

Although Wirth blamed the defeat of his efforts on AT&T's dilatory tactics, some congressional members and communications sources say defeat came because support for the bill began to wane.

Wirth's action "demonstrates that his support for the bill began to unravel," charged Rep. Tom Corcoran (R-Ill.), who was led the fight against the bill.

AT&T's opponents all expressed disappointment with Wirth's decision to drop the bill. "AT&T has bought the store again but at the price of being exposed for what it is--a self-serving corporate giant willing to sacrifice the American ratepayer and a competitive telecommunications industry for its own profit," charged the The National Coalition for Fair Rates and Competition--an organization representing dozens of AT&T's competitors, consumer groups and large corporations with heavy telephone usage.