Former president Carter said yesterday that he was dropping his plans to sue The Washington Post for libel over a gossip item it published in its Ear column on Oct. 5.

Carter said he reached the decision after receiving a letter of apology and retraction Friday from Post publisher Donald E. Graham.

In a statement released by his Washington attorney, the former president said the item had caused "considerable concern" to him and his wife Rosalynn. He added: "Fortunately, because of my previous position, I had access to the public news media and could draw attention to my problem. Many victims of similarly false allegations do not enjoy this opportunity, but suffer just as severely."

The story that led to the flap between the former president and the Post concerned rumors that Blair House had been bugged during president-elect Reagan's stay there prior to Inauguration Day.

Graham's letter of apology said the gossip item was based on the account of a source whom the paper believed to be credible at the time of publication. The Post has not identified its source.

In his statement yesterday, Carter criticized the paper for taking 2 1/2 weeks to retract its story. He also raised the question of whether The Post should be carrying a gossip column.

"The decision by the publishers of a nationally and internationally influential newspaper like The Post to print a regular column which is widely known to be based on rumor and gossip adds unwarranted credence to its false reports," the statement said. "Even an instant and enthusiastic effort by newspaper editors to correct errors can never be completely successful in erasing the damage caused by unfounded gossip."

The Ear, which had been a popular feature of the defunct Washington Star, has been running in The Post since last month.

Carter's statement also took issue with an Oct. 14 editorial in which the paper made its first formal response to his demand for an apology.

"The editorial seemed to claim the right to publish rumors that are damaging to innocent people even if the rumors are believed by The Post editors to be untrue. Having seen the effects on my family and friends in this and other instances that publication of false allegations can have, I could not allow such a claim to go unchallenged . . .yesterday's letter from Mr. Graham now makes clear that The Post does not claim the right to print rumors without verification of their accuracy."

Longtime Carter spokesman Jody Powell said yesterday that the president decided not to proceed with a libel suit because "he concluded that the things that most concern him about this case could be addressed outside of a courtroom."

Powell said both he and Carter hoped the incident would receive a full airing in journalism reviews and in the community at large. "The president's hope is that without the threat of legal action hanging over its head, The Post will deal fairly and straightforwardly with some of the issues raised by this case," Powell said.