Two years ago, the Commerce Department gave a West German firm permission to turn American-made strategic material into bulletproof garments for the Syrian military.

Late last year, the Defense Department, expressing fear that the garments would wind up in the hands of Islamic terrorists trained in Syria, agreed to pay the firm nearly $12 million for 11,000 flak jackets and limb protectors that had been manufactured but not yet delivered to Syria.

What happened in the two-year interval was a costly collision of U.S. commercial and defense interests, resolved only after the White House intervened and the Pentagon decided to waive its procurement rules. Since then the Pentagon has had problems unloading the 7,000 bulletproof vests and 4,000 arm and leg guards that it never wanted in the first place.

"It was a damage-limitation exercise," a Pentagon official said. "Commerce made the mistake and we had to pick up the marbles."

The story began in 1983, when the Commerce Department granted licenses to the Valentine Mehler concern, of Fulda, West Germany, to reexport bulletproof garments made of the synthetic, high-strength fiber Kevlar, which Mehler had reportedly arranged to buy from Du Pont for $10 million.

Mehler planned to weave the Kevlar into 63,000 garments and had clearly indicated in its license applications that its finished product was intended for the Syrian Ministry of Defense, according to Pentagon officials.

Walter Olson, deputy assistant commerce secretary for export administration, said the licenses were approved at a time when the United States was trying to improve relations with Syria. He said that while Commerce regulations prohibit the export of certain military items to the Syrians, they do not specifically rule out bulletproof garb in the quantities listed by Mehler.

"It was a routine type of case," said Olson.

But a controversy broke out within the government after Rep. Bill Green (R-N.Y.) wrote the White House and State Department complaining about the licenses. Both the White House and the department opposed the deal, expressing concern that Syria might have supplied expertise and materiel to Islamic terrorists for the October 1983 attack on the U.S. Marine barracks in Beirut and the earlier bombing of the American Embassy there.

U.S. envoys asked the West German government to block Mehler's plans. But Bonn said it had no authority to intervene.

Commerce, meanwhile, rescinded Mehler's licenses in December 1983, but it was too late to stop the first shipments of Kevlar to the firm.

Enter the Pentagon, which has fought for stricter controls on military exports because of concerns that they might wind up with unintended third parties. Defense officials proposed a financial settlement with Mehler as the best way to keep the gear out of Syrian hands.

"Our worry was that every terrorist trained and equipped by Syria would have a flak vest and would be that much more of a lethal weapon," a Pentagon official explained.

To buy back the vests made for Syria, Deputy Defense Secretary William Howard Taft IV had to sign a special waiver of his department's competitive-bidding requirement, since only Mehler was being considered in the deal. The White House provided the justification Taft needed, citing national security concerns.

A nine-member team finally began negotiations with Mehler in November 1984. The firm had already begun work on 90,000 pounds of Kevlar shipped by Du Pont -- a fraction of the $10 million worth of material needed to fill Syria's order.

In a settlement signed in early December, the Pentagon agreed to pay Mehler $11.8 million for the 11,000 protective vests and limb guards already produced for Syria -- about one-sixth of the original order.

Pentagon officials refuse to reveal details of the agreement but say it covers "intangible costs" to Mehler, including the performance bond it forfeited by reneging on its contract with Syria and administrative costs of the bond.

It is unclear how much Mehler made on the Pentagon transaction.

Mehler completed its deliveries to the United States in late January. While the garments were designed to Syrian specifications, they passed Defense Department safety tests and have been offered to U.S. Customs officials and local guards at U.S. installations abroad as well as the military.

In the past three months, however, bureaucratic obstacles have prevented the Pentagon from transferring the equipment to the agencies, officials said.

DOD officials say that the gear now in inventory will eventually be used.