Plans to build a housing development on the 20-acre Tregaron estate in Northwest Washington have been dropped by the development firm of Rozansky and Kay. At the same time, former vice president Nelson Rockefeller yesterday signed a new contract with the same developers, clearing the way for them to purchase and build 120 houses on his 25-acre Foxhall Road estate.

Tregaron, an imposing estate located just east of Washington Catedral, contains terrain that is so rough and hilly, developer Alan Kay said, that "We could not economically build single-family houses on the tract without completely destroying the whole tract by grading it, leveling in and cutting down every single tree on it."

For a time, the firm considered leaving much of Tregaron as green space while building clustered town-houses on a portion of it. But this would have required a zoning change that could have taken two years to obtain because of neighborhood opposition to development.

Meanwhile, officers of the Washington International School, which occupies the old Tregaron mansion on the property, are continuing their efforts to buy the estate from the owners, several heirs of the late U.S. ambassador to Russia, Joseph Davies.

Robert Zimmer, an attorney for the school, said that the school officers are continuing to press their suit against the heirs with a claim that the heirs once agreed to sell to the school but then backed out. The heirs have countersued. At least one of the heirs, who asked not to be identified, said yesterday that the school has been given notice to move out when its lease expires this summer.Zimmer said the notice is not valid.

Tregaron's neighbors appear pleased at what has happened. "Realism has determined the decision of Rozansky and Kay," said Stephen Koczak, president of the Cleveland Park Citizens Association. He said he hopes that "citizen input at the outset will have a bearing on all major rezoning and development issues" in the city.

When Rozansky and Kay originally contracted to buy Tregaron last November, the developers stipulated that they could withdraw from the deal should engineering studies of the terrain show it to be too rough. The studies showed just that, and the firm was able to withdraw, losing only the money that was spent on the studies.

Rockefeller's signature on a new contract yesterday means that Rozansky and Kay now have exclusive rights to but the land - which Alan Kay said yeaterday the firm plans to go ahead and go within the next few months.

The original $5.5 million purchase agreement signed by Rockefeller and the developers last September was tentative, allowing Rockefeller to continue to show the property to other prospective buyers, with Rozansky and Kay having a right of first refusal.

Hugh Morrow, a Rockefeller spokesman in New York, issued a statement yesterday praising the developers for holding "constructive meetings" with area citizens and for hiring "an outstanding architect," Arthur Cotton Moore, to design a housing project for the site.

"In the light of these developments, Governor Rockefeller has decided to take his property off the market and has today signed a firm purchase contract with Rozansky and Kay," the statement said.

Kay said, "We are proceeding ahead toward our development and are having discussions with the (citizen) representatives in order to have a project that is mutually acceptable." He said construction would begin as soon as a building permit is obtained.

Moore's plans call for an unusual development of 120 luxury houses clustered in crescents and circles amid large green spaces. After he disclosed these plans to the citizens in a closed meeting Feb. 24, a citizen spokesman said, "Everyone has emerged from this feeling greatly relieved."