After winning a two-year fight to set up a chancery at 2929 Massachusetts Ave. NW, the Saudi Arabian government has agreed not to do -- at least for five years.

"This is an act of diplomacy on the part of the Saudi Arabian ambassador," said Thomas G. Corcoran Jr., attorney for the Cleveland Park Citizens Association and for about thirty individual residents of the area.

Whayne S. Quin, the attorney who negotiated the settlement for the Saudis, said that after the original application was filed, there was a change in ambassadors and "the new ambassador approached the matter in a different way."

Last week the citizens represented by Cocoran reached an agreement with the Saudis, which was filed with the D.C. Court of Appeals. Under the terms of the settlement, the Saudis will not use the house at 2929 Massachusetts Ave., which is next to their embassy, for office purposes for at least five years.

Instead, the Saudis plan to use both buildings for residential purposes and possibly join the two buildings to create an enlarged embassy. The neighbors have agreed not to oppose any plan to join the buildings. In addition, the Saudis have agreed to add no more than five parking places to the embassy lot.

The additional traffic that the chancery would generate was one of the objections neighbors raised to the chancery plan in prolonged hearings before the D.C. Board of Zoning Adjustment (BZA) last year.

Two years ago, despite virulent citizen opposition, the D.C. Zoning Commission set up diplomatic overlay zones in residential areas on and around Massachusetts Avenue. Embassies are allowed to set up chanceries -- or offices -- in these zones as long as the BZA determines that the chanceries would not be out of character with the neighborhood. To date, only two governments have applied for chanceries in these zones. Bangladesh's application was turned down, but Saudi Arabia's was approved last year.

But neighbors of the planned Saudi chancery went to court to have the decision overturned. Before the case could be heard by the D.C. court of Appeals, the settlement was reached.