A home for mentally retarded persons run by the Amish Mennonite Church near Charlottesville has agreed to stop spanking its inmates and to proceed with an application for a state license.

The Faith Mission Home became the focus of controversy during the last session of the Virginia General Assembly when it tried unsuccessfully to get an exemption from a law banning corporal punishment in state-licensed institutions.

The so-called "spanking bill" was withdrawn after vigorous protests from mental health groups and a few legislators who rejected the argument that corporal punishment was a form of "biblical discipline."

The home had resisted state licensure for more than a year, arguing that many requirements violated their religious principles. But in a letter sent to parents this week, Daniel Yoder, director of the 17-year-old home, said the Mennonite home now had no choice but to comply with the law.

"Although we still believe there should be an alternative for reputable church-operated ministries, we also feel it is our moral and scriptural responsibility to comply with the law in as far as we conscientiously can," Yoder wrote.

At hearings in Richmond, Yoder had testified that spanking was used infrequently and only as a "last resort" to enforce discipline. The final bill, supported by the state, would have set guidelines for the administration of corporal punishment.

"This is part of our faith; the Bible commands it and it works," Yoder told one legislative committee. "We're talking about a parental type of spanking, not a beating. There's nothing that will produce a change of attitude like a bit of biblical chastening."

Dr. Joseph Bevilacqua, state director of mental health and retardation programs, said he was "extremely pleased" to receive the home's formal application for a license on Monday. The licensing procedure should take four to six weeks, he said.

The home, which serves 54 retarded persons ranging in age from 7 to 28, would still need a waiver to exempt its staff from holding certain academic degrees. Because Mennonites are not required to go to school beyond the eighth grade, the home's spokesman, Wayne Abrams, said the home hopes to be able to negotiate an exemption to that rule.

"I believe it is an excellent institution for the mentally retarded and I am sure the parents will be delighted," said state Sen. Charles Colgan (D-Prince William), who sponsored the original bill on behalf of a constituent whose child is at the home. "I'm glad they worked it all out."