The D.C. City Council, in the wake of an unprecedented lobbying campaign, reversed itself yesterday and gave tentative approval to legislation that would establish a mandatory no-fault auto insurance system for drivers of all 250,000 vehicles registered in Washington.

But in a move supported by trial lawyers fearful of losing business, the council included provisions that no-fault advocates contend negate many of the conveniences and financial benefits of a true no-fault system.

The major change, approved on a 7-to-6 vote, lowered from $7,500 to $2,500 the amount of medical costs that accident victims must incur before they could seek damages beyond reimbursement for medical bills by suing for pain and suffering.

The lower threshold would sharply increase the number of damage suits allowed under the bill, according to no-fault supporters, and would result in higher insurance premiums.

The basic theory behind no-fault insurance is that it is supposed to lower insurance premiums by establishing standard reimbursement procedures for personal injuries that reduce the number of lawsuits. However, property damage payments are denied or granted on the basis of who is at fault in an accident.

"I think this bill has been destroyed," said council member Polly Shackleton (D-Ward 3) during a lively four-hour session attended by several hundred spectators who filled every seat and, in some instances, stood in the aisles of the council chambers on the fifth floor of the District Building. "It's a victory for the trial lawyers," she said later.

Council member Nadine P. Winter (D-Ward 6), who drafted the basic compromise that the council approved yesterday, contended that the bill was still better than the compulsory liability measure approved by the council two weeks ago, when it rejected a no-fault proposal with a higher threshold.

"It's going to cost more money" than the no-fault plan rejected earlier, Winter said. "But it's still cheaper" than the compulsory liability system, she said.

Lawyer Larry C. Williams, the registered lobbyist for the trial attorneys, praised the bill approved yesterday.

"We won for the public," said Williams. He contended the bill would provide insurance for District motorists but would be less likely to interfere with lawsuits arising from claims.

In addition to the lower threshold, the council tacked on an amendment requiring D.C. motorists to carry liability insurance to protect themselves when driving in areas outside Washington that do not have no-fault systems, such as Virginia.

Another amendment would prohibit insurance companies from using sex, marital status or whether a person has ever been insured as factors when determining the cost of premiums for individual motorists. Insurance companies now generally charge the highest rates for unmarried males under 25, for instance, because they have more accidents.

Under the bill approved yesterday, District motorists involved in accidents could receive up to $100,000 in medical benefits without determining who was at fault in a wreck. In addition, injured persons could be paid up to $2,000 a month in lost wages and up to $2,000 for funeral expenses. Vehicle repairs costing up to $5,000 would be covered by the insurance company of the driver judged to be at fault in an accident. Repairs over $5,000 would be subject to resolution among the parties.

Officials of the Government Employees Insurance Co., which mounted an unprecedented lobbying effort in favor of no-fault, said that the bill approved yesterday was "absolutely unacceptable."

Geico board chairman John Byrne estimated that his company, which writes about one-third of the auto insurance policies in the city, might have to raise its rates as much as $200 to meet the new conditions of the bill. The company's cheapest liability policy, for good drivers, now costs about $180 a year.

"The lawyers gutted the key provision," said Byrne, whose firm mailed out more than 213,000 letters in support of the no-fault measure. "It's a disaster, utterly absurd."

Byrne said the $2,500 threshold was unacceptable because it would make it too easy for unscrupulous accident victims, doctors or lawyers "to run up the claims" to reach the pain and suffering level.

Trial lawyers, acting through the Association of Plaintiffs Trial Attorneys of Metropolitan Washington, have opposed any threshold and have indicated they will attempt to lower the amount still further when the measure, approved on first reading yesterday, comes up for a second and final reading June 8.

No-fault supporters said yesterday they will seek to raise the threshold. If at its next meeting the council approves changes that its chairman deems "substantive," the measure will have to receive still another "second reading" approval, presumably at the council's next scheduled meeting on June 22, further prolonging a controversy the council has actively wrestled with for more than a year.

The crucial 7-to-6 amendment on the lower threshold was supported by five council members who voted against no-fault at the previous meeting--Charlene Drew Jarvis (D-Ward 4), Jerry A. Moore Jr. (R-At Large), John Ray (D-At Large), John A. Wilson (D-Ward 2) and Wilhelmina J. Rolark (D-Ward 8)--and two council members who had supported the no-fault bill two weeks ago, David A. Clarke (D-Ward 1) and H.R. Crawford (D-Ward 7).

"We've got to give it a chance," Crawford said of the amendment lowering the threshold. "We did a great deal of politicking," Crawford said. "There was something in there for everyone."