Attorney General William French Smith has yielded to State Department complaints and stopped a potentially politically sensitive backlog of Indochinese refugees from building up in Thailand.

The Immigration and Naturalization Service had deferred processing of some 5,000 Indochinese because its officers in Thailand concluded they were fleeing for economic rather than political motives.

Traditionally, the United States has considered anyone fleeing a communist country as a refugee but Congress passed a law last November redefining the term. The new definition of a refugee is someone who fled his or her country because of persecution or threat of persecution and who could not return home.

The law required INS district directors to determine who fit the definition before asylum could be granted. Generally, the result has been a tendency to disqualify for resettlement those who cite economic reasons for their departure.

The State Department, on the other hand, argued the INS should consider foreign policy implications and humanitarian issues. At stake, officials said, were U.S. commitments to Southeast Asian governments to relieve some of the burden posed by hundreds of thousands of Indochinese refugees in the last two years.Moreover, there was the fear that if U.S. resettlement dropped off sharply, South Asian nations would resume the policy of turning away "boat people."

Secretary of State Alexander M. Haig Jr. complained to Smith about the deferrals when the rate of Indochinese refugees entering the United States dropped from a scheduled 14,000 a month to less than 10,000 a month.

Kenneth W. Starr, Smith's counselor, said yesterday that the attorney general discussed the issue in mid-May with Morton Abramowitz, U.S. ambassador to Thailand. "The Justice Department, through INS, at this time is deferring to State on the refugee status of these people," Starr said.

David Crosland, INS' general counsel, said yesterday that none of the 5,000 persons held back since the first of the year had ties to the United States. There are more than 300,000 potential refugees from Vietnam, Cambodia and Laos in camps in Thailand.