The government has agreed to support legislation that would pay $1.7 million to James R. Thornwell, a former private whom the Army admitted giving LSD and mentally and physically abusing during a three-month interrogation in 1961.

In an agreement reached two weeks ago with Thornwell's lawyer and announced here yesterday, the government will support legislation - sponsored by Sen. Ernest F. Hollings (D-S.C.) - to compensate for the emotional disorders and severe pain that Thornwell says he has suffered for the last 18 years as a result of the drugging and the interrogation.

If the legislation paying Thornwell the $1.7 million passes, as appears likely, the veteran will drop a $10 million damage suit he filed against the federal government after he inadvertently discovered that his psychiatric problems were the side-effects of an LSD drugging he unwittingly received while in an Army prison in France.

Army documents, released to Thornwell's attorney under a Freedom of Information Act request after the suit was filed, revealed a secret Army program called "Third Chance," under which nine foreign nationals and Thornwell were administered LSD without their knowledge or consent, to test the effects of the hallucinogen as a potential "truth serum" that might be used by enemies on American prisoners of war.

The Army became interested in LSD in 1955 when it was learned that the Soviet Union had bought doses of the drug from a Swiss laboratory.

Thornwell, now 41, was arrested by the Army in March 1961, and accused of stealing classified documents. According to Army documents, he was isolated in a small cell with covered windows, was denied access to food, water and toilet facilities, and was threatened, beaten, called a homosexual and profanities, all in an effort to get him to confess.

Six weeks into his interrogation, Thornwell was injected with the LSD without his knowledge, and suffered "an extreme paranoiac reaction," according to the documents. The Army interrogators, apparently trying to simulate an interrogation by enemy powers, then threatened to permanently extend Thornwell's drug-induced insanity.

The Army documents written after the abuse called this technique "effective" as a "duress factor."

The Army later chose not to pursue the theft charges against Thornwell, the documents reveal, for fear that pressing the matter further would shed publicity on the unusual interrogation session and methods. Thornwell since discharged, now lives in Oakland, Calif.

Since the experience, Thronwell's life has been characterized by nightmares, headaches, recurrent depression, various psychiatric disorders and severe physical pain, according to interviews and from court records. He has been unable to hold a job for more than two months and he is unable to deal with situations involving stress or pressure.

In the suit against the government, filed in October 1978, Thornwell's lawyer, Harvey Kletz, charged that the experience had left his client "a social and emotional cripple, chronically and painfully isolated and withdrawn from the normal experiences of life in human society."

The $1.7 million payment proposed in the legislation represents Thornwell's lost earnings, estimated future earnings and psychiatric expenses."But I don't think any amount of money can compensate for 18 years," Kletz said yesterday.

Army and intelligence agency drug experiments were systematic and almost commonplace, according to reports of projects that have been coming to light only in the last few years. In 1975 the Army acknowledged administering LSD to thousands of soldiers at its chemical warfare laboratories at Edgewood Arsenal in Maryland. In 1976, the government awarded $750,000 to the widow of Dr. Frank F. Olsen, a civilian biochemist working for the Army who committed suicide in 1953 after CIA agents laced his drink with LSD without his knowledge.

"Third Chance," the Army program under which Thornwell was allegedly abused, was part of a large experimentation project, which also included a project known as "Derby Hat" and the Edgewood druggings. CAPTION: Picture, JAMES R. Thornwell...ex-Army private claims abuses