Nike Inc. has agreed to stop selling a new line of basketball shoes because they bear a logo resembling the Arabic word for Allah, or God, which some Muslims found offensive, a company official said yesterday.

Nike's action came after weeks of negotiations with the Washington-based Council on American-Islamic Relations (CAIR), an Islamic advocacy group that had threatened to urge a boycott of Nike products by the world's 1 billion Muslims.

The Beaverton, Ore.-based company will call back more than 38,000 pairs of shoes in its distribution system and will accept potentially thousands of returns from retailers around the world.

The company also apologized for "any unintentional offense" caused by the logo, made internal changes to "tighten scrutiny of logo design," and, as a goodwill gesture, pledged to upgrade a sports facility at an Islamic elementary school in this country.

"Through this process, our understanding of Islamic concerns has been deepened and we apologize for any unintentional offense to the Islamic community and we are glad we have been able to resolve our differences," Nike spokesman Roy Agostino said.

The incident highlights the potential for cultural misunderstandings when companies have a global market reach, and demonstrates the growing influence of Muslim consumers in this country.

The offending design -- the word "Air" written in stylized letters that resembled flames -- was created for Nike's Summer Hoops line of basketball shoes. The resemblance to the word Allah was unintentional, Nike officials said.

The company was alerted to the similarity by a distributor in Saudi Arabia last September. On his advice, Nike modified the design by separating the first two letters of Air.

The modified logo was put on 1.2 million pairs of shoes that began arriving at retailers last March. Almost immediately, CAIR received complaints from U.S. consumers.

Nike diverted 30,000 pairs with the modified logo from Muslim countries, but CAIR said this was insufficient and demanded a recall.

"They did {the diversion} out of cost-benefit analysis and not out of respect for Muslims," said CAIR Executive Director Nihad Awad, who said the logo was offensive no matter where it was sold.

Agostino said Nike has agreed to remove the logo from shoes still in its distribution system and to accept returns of unsold shoes from retailers. He said the company did not know how many of the shoes -- which are priced in the United States at $70 to $120 -- already have been sold or how many may eventually be returned. He declined to say how much the measures will cost Nike.

"We congratulate Nike for its decision to bring this issue to a conclusion," Awad said, adding that he doubted senior managers were aware of the "insult" the logo would cause.

Awad said Muslims do not object to "Allah" on caps and T-shirts, but its appearance on shoes suggests disrespect. He compared it to putting "Jesus" on shoes.

On another politically charged front -- the treatment of workers in Asian factories that make Nike shoes -- the company got a favorable review yesterday from Andrew Young, the former U.S. ambassador to the United Nations.

Young, who was hired by Nike to conduct an independent investigation into conditions in its factories, said the 12 sites he visited in Vietnam, Indonesia and China "were physically as clean and modern as any manufacturing sites I have seen in the U.S.A. and certainly did not appear to be what most Americans would call sweatshops.' "

Young did find fault with plant managers who, he said, rarely spoke the local language fluently. He recommended a "better grievance system," and suggested that the company promote the development of worker representatives who are not burdened with full-time work schedules.

Nike said in a statement that it had "agreed fully to implement {Young's} recommendations" and would go even further by, for example, imposing financial penalties on factories that violate its code of conduct.

Young, who stressed that he had been given full authority to examine the company and write his report any way he chose, said he had not scrutinized the allegation that Nike pays its workers too little. Although he said he favored global minimum wages and standards, Young said "it is not reasonable to argue that any one particular U.S. company should be forced to pay U.S. wages abroad while its direct competitors do not." Staff writer Paul Blustein contributed to this report. CAPTION: Nike will recall and stop selling shoes displaying an "Air" logo that resembles the Arabic word for Allah.