Mayor Marion Barry, backing down from a confrontation with the D.C. Council and the city's labor unions, has decided to cancel plans to furlough 21,000 city workers to help close a projected $90 million budget deficit this year, administration officials said yesterday.

Lurma Rackley, Barry's press secretary, announced the furlough decision outside the federal courthouse where the mayor is on trial. About 100 D.C. workers had gathered there yesterday to protest the administration's furlough plan.

Rackley said the mayor plans to hold a news conference today to explain his decision, which sources said angered his top advisers because it appears to undermine the city's credibility in handling its mounting fiscal problems.

The furlough plan was projected to save $4 million, but more important, it would have eased the city's cash flow problem, administration officials said. City officials have said the furloughs were necessary to ensure that the city would meet its payroll this summer, and they were unsure what steps they will take to find new savings.

City Administrator Carol B. Thompson and Deputy Mayor for Finance Robert Pohlman were described as furious with Barry's decision, and Pohlman was so angry that he walked out of a meeting with Barry and other advisers Wednesday evening, sources said.

Barry was said to be leaning toward vetoing legislation that would require the city to subsidize the health insurance premiums for the Whitman-Walker Clinic, the city's major AIDS service organization. The clinic's officials have warned that its rising insurance costs could put it out of business.

While Barry also intends to announce his decision on the clinic today, clinic administrator Jim Graham expressed concern about the possibility of a veto. "We have worked very closely with the administration," he said. "We need their help at this point."

On the furloughs, Barry appears to have been boxed in by the D.C. Council, which recently approved emergency legislation requiring the city to give workers 90 days' notice before a furlough can go into effect.

The legislation would kill the four-day furlough now scheduled for virtually all non-public safety employees under the mayor's control.

When Barry and his top aides had indicated he planned to veto the legislation, the council prepared to hold a special session today, interrupting its summer recess, to override the veto. Both council insiders and administration strategists said the mayor almost certainly would have been defeated.

Some administration sources said they believe Barry decided to sign the bill to deny a political victory to his rivals on the council, particularly Chairman David A. Clarke (D), who is running for mayor, and the bill's author, Betty Ann Kane (D-At Large), who is running for Congress.

But Kane was quick to proclaim victory, saying, "This is going to force them to look at other ways" of balancing the budget. She described the furlough plan as "a last-minute panic at the expense of employees."

Jakki Dennis, a spokeswoman for Clarke, said the council chairman "was happy this is going to happen . . . . He does not believe that the budgetary problems are the responsibility of the employees of the city, but are the result of the administration's spending habits."

John A. Wilson (D-Ward 2), chairman of the council's Finance and Revenue Committee, criticized the administration for "playing politics" with D.C. workers. "I wish people would set a course and stick with it," he said.

Union leaders also expressed satisfaction. "We're pleased that the mayor is doing the right thing," said Kenneth F. Greene, chief of the local American Federation of State, County and Municipal Employees union. "A lot of time, energy and expense could have been avoided had the decision been made a long time ago."

More than 100 union members who work for the city -- trash collectors, sewer servicers, water treatment workers, tax collectors, consumer regulators, police crossing guards and UDC educators -- protested in the hot sun yesterday outside the courthouse.

"We are providing critical services to the city and we don't want our image further eroded because services might be delayed," said Edward Woodland, an AFSCME official.

Staff writer Mary Ann French contributed to this report.