A land dispute between the Catholic Archdiocese of Washington and the U.S. Soldiers' and Airmen's Home is being settled by federal legislation aimed at keeping open the financially ailing home for veterans.

Under the terms of a defense bill signed this week by President Clinton, the Soldiers' Home is no longer required to sell a choice, 49-acre parcel of land bordering North Capitol Street to the archdiocese.

Instead, the home can sell or lease the land to the highest bidder, with neighboring Catholic University given the right of first refusal. The value of the land is not known--an appraisal is being conducted--but the change may mean more money for the historic Soldiers' Home. It was built with booty from the Mexican War but for years has been struggling financially.

Yesterday, the two parties reacted favorably to the legislation. "This is all fine to us, because it allows open competition," said Laurence Branch, executive director of the Armed Forces Retirement Home Board, which oversees the home and its 1,150 residents.

"We hope the new legislation will enable the sale to be completed, which would be in everybody's best interest," said the Rev. William E. Lori, auxiliary bishop of Washington.

The dispute involved two venerable institutions, the archdiocese and the home, where Abraham Lincoln sought refuge from the Civil War and where he composed the last draft of the Emancipation Proclamation.

Last year, the home was studying a plan to generate income through a public-private venture aimed at developing the vacant tract of land, which borders the property. But the plan was derailed last fall by a surprise amendment from Sen. Rick Santorum (R-Pa.), which mandated that the tract be sold to the archdiocese.

The archdiocese wants to build a biomedical research facility and other buildings for the university and a nearby conference center, but officials at the Soldiers' Home feared they would not get a fair price if forced to sell to the church.

Veterans protested the surprise legislation, accusing Santorum of arranging a "sweetheart deal" for the church. The archdiocese argued it would pay fair price for the land. Under the compromise, which was crafted by Reps. Herbert H. Bateman (R-Va.) and Duncan Hunter (R-Calif.), the Soldiers' Home is blocked from developing the parcel itself, but instead must either sell or lease it.

Veterans groups, which had lobbied strongly on behalf of the Soldiers' Home, helped broker the new legislation. "If they can sell it at a fair appraisal, that's a healthy chunk of change," said Paul Arcari, co-chairman of the Military Coalition, a group representing many veterans organizations.

The facility is supported by a monthly 50-cent fee paid into a trust fund by all active duty members of the armed forces, by military fines levied against troops and by fees from residents. But it has fallen on hard times, a victim of the end of the Cold War and military downsizing. Income to the trust fund has decreased 39 percent since 1991, forcing the home to close two of its four dormitories.

Branch said the long-term survival of the institution depends on an increase in the monthly fee paid by all members of the armed services. Congress authorized the Defense Department in 1995 to increase the fee from 50 cents to $1, but until now, the Pentagon has balked at implementing it because of objections from the Navy.

In an interview yesterday, Undersecretary of Defense Rudy de Leon said he is close to recommending that the increase, which would generate $7 million annually for the home, be implemented. "We're going to do all that we can to make sure the veterans are well taken care of," he said.

The added revenue would dramatically improve the financial position of the home. Without it, officials said the home would face bankruptcy in a few years. De Leon also said he would implement a just-completed inspector general's report that recommends examining the home's 665-person work force for possible cuts. "We want to ensure that the home is the most effective organization it can be," he said.

Residents of the home expressed relief yesterday about the new legislation. "It's a hell of a lot fairer than it was," said William Woods, 69, an Army veteran who served in the Korean and Vietnam wars. "People here have been worried they were going to end up on the street."

The new legislation also authorizes the home for the first time to receive funds to preserve and maintain four historic buildings on the grounds, including the Anderson Cottage, which Lincoln used as a summer retreat. But the Department of the Interior has already informed the home that no funding is available this year.

CAPTION: The U.S. Soldiers' and Airmen's Home, which is home to more than 1,100 veterans, may sell or lease its 49-acre parcel of land, and neighboring Catholic University has the right of first refusal.