A yearlong dispute over the ownership of rare items of Judaica smuggled out of Nazi Germany has been settled in a court-approved agreement that orders that the rarest items sold by Sotheby's, the auction house, be recalled from their buyers so that they may be made available to the public.

The settlement ends -- at least legally -- a controversy that erupted last summer. At that time Alexander Guttmann, an emeritus professor at the Hebrew Union College, a rabbinical school in Cincinnati, sold rare manuscripts and books that he says he was given to keep and smuggle out of Nazi Germany in 1940. He says he smuggled them out at great personal risk. Guttmann maintains that he was given the items by the head of the board of directors of the Jewish seminary in Berlin where he taught. The seminary was destroyed by the Nazis in 1942.

New York State Attorney General Robert Abrams filed suit against Sotheby's last summer alleging that the sale was fraudulent because Guttmann did not really own the books and manuscripts.

The proceeds from the Judaica sale, according to Sotheby's Vice President David Yudain, were $1.9 million. Under terms of the settlement, Guttmann will receive $900,000 -- about half of what he would have gotten. Those buyers who must return items, Yudain said, will be reimbursed with interest; Sotheby's will also surrender its $212,000 commission.

The settlement was approved by New York State Supreme Court Judge Robert E. White in Manhattan on Tuesday. White, who has asked for public comments until July 31, will decide by Aug. 6 whether to make this settlement final.

"The attorney general is obviously satisfied with the settlement," said David Fishlow, deputy press secretary for Abrams. ". . . These precious manuscripts and early printed books will be brought into the public domain where they always should have been."

Said Yudain, "Everyone gives up something and everyone gets something . . . We save a lot of money on a long and expensive trial. We are pleased that there is no finding of wrongdoing and we don't have to change any of our existing policies."

Guttmann, now 84, and his wife, Manya, signed their part of the agreement in Cincinnati. They were not present in the New York court for the settlement. According to the Guttmanns' New York attorney, Robert Weiner, Alexander Guttmann's health has deteriorated this past year. "His hearing is very bad," said Weiner.

The Guttmanns have mixed feelings about the settlement, according to Weiner. "They are on the one hand glad that the matter has been resolved," he said. "The trial would have been a hardship in terms of the length of the trial and the emotional impact of the constant coverage. They have always been private people. On the other hand, they feel they did not have the opportunity to fully explain all the facts and set forth what happened, and there's a little frustration in that."

The redistribution of the Judaica is rather complicated. For example, if copies of a rare book can be found in a public institution, a buyer of that item will not have to return his copy; most of the 33 rare books sold will probably be retained by their owners, according to Sotheby's. Some buyers represented public institutions and it is thought likely that they will be allowed to keep what they bought.

The most precious items -- a 15th-century Bible and a 14th-century machzor, or prayer book -- had been bought by the Jewish Theological Seminary of America, which chose to return the items. Now, as part of the settlement, an anonymous donor has given a total of $900,000 to two institutions to purchase the items: Yeshiva University in New York will buy the Bible and the Jewish National University Library in Jerusalem will buy the prayer book.

Twenty-one manuscripts, considered unique, will have to be returned to Sotheby's and then turned over to the court. The Jewish Restitution Successor Organization will make recommendations on what scholarly or public institutions should receive the material.

Yudain says that "anything that's left" -- any money not given to Guttmann or distributed to the buyers who had to give up their purchases -- will be turned over to "a special fund" set up by the court.

"There's a plan, detailed in the agreement, for the distribution of those funds," said Yudain. "Basically it will be used to purchase Judaica and then there's a plan for the way that it will be distributed to various institutions . . . We waived our commission and it will be donated to the fund."

There was no finding of wrongdoing on the part of Sotheby's, but the attorney general's office was critical of the auction house's actions. "From a legal point of view, Alexander Guttmann never owned these," said Fishlow. "Sotheby's took no steps to adequately determine that. And they never made it clear to buyers that there was a question about title."

He concluded that "in the view of the attorney general they acted improperly."

Yudain said Sotheby's will not change its policies. In a July 15 letter from Sotheby's to Abrams (provided by the attorney general's office), the auction house stated that it "only sells items where the consignor has warranted to us in writing the ability to convey good title." Wiener contends that the Guttmanns had a letter of legal opinion stating that the couple owned the items.

According to Weiner, the Guttmanns did ask Sotheby's to assume responsibility if any legal claims to title of the Judaica were filed. "The Guttmanns anticipated there might be claims," said Weiner. "My understanding was that there was some concern the German government might raise some claim. They did not ever anticipate the kind of claim that was brought."