The D.C. City Council gave final approval yesterday to a bill allowing District banks to participate in a limited interstate banking arrangement with 11 southeastern states, including Maryland and Virginia, but it rejected a proposal to open the city to nationwide banking in two years.

The legislation, approved on a 10-to-0 vote with one abstention, was viewed as a victory for the District's banking community, providing what it saw as a more gradual way of bringing the District into an age when bank services increasingly are being offered across state lines.

Local bankers waged an intensive lobbying campaign to persuade the council not to amend the bill so that Citicorp, the giant New York bank, and other big money-center banks could establish full banking services here in exchange for making major financial commitments to District economic development projects.

The legislation, if signed by Mayor Marion Barry, would eliminate an obstacle for two pending mergers involving District banks. Sovran Financial Corp. of Norfolk has agreed to acquire D.C. National Bancorp, parent company of D.C. National Bank; and United Virginia Bankshares, the state's second largest bank holding company, has agreed to buy NS&T Bankshares Inc., holding company for NS&T Bank. Each deal faces other regulatory hurdles.

But some council members speculated that Barry, who has 10 days to sign the legislation, may veto it.

Barry supported adding a "trigger" clause to the banking measure that would have allowed any bank in the country to gain automatically the right to offer full banking services in the District within two years, and a provision that would have allowed some banks to come in earlier if they made major financial commitments to the District.

In addition, instead of having the City Council review bank applications for acquisitions, Barry wanted to appoint a banking superintendent to perform the task.

Council members Frank Smith (D-Ward 1) and Polly Shackleton (D-Ward 3) tried unsuccessfully to amend the banking bill to include Barry's provisions. Courtland Cox, an assistant to Curtis McClinton, the deputy mayor for economic development, said Barry still wants the provisions, but has not indicated whether he will veto the legislation. "I think there is a good chance that it will be vetoed, and I would not vote to override a veto," said Smith.

The bill approved yesterday calls for a reciprocal arrangement with 11 states permitting banks and holding companies in the District and the 11 states to acquire one another. In addition to Maryland and Virginia, the states in the District's regional banking arrangement are Alabama, Florida, Georgia, Louisiana, Mississippi, North Carolina, South Carolina, Tennessee and West Virginia.

Local bankers maintain that as their banks merge with others, stronger institutions are formed, creating the kinds of economies of scale that hold down expenses.

Customers may benefit from the mergers expected to result from the legalization of interstate banking, but some consumer advocates have argued that banks seek the right to cross state lines more often as a way of attracting more depositors than as a way to benefit the consumer.

Regional pacts, such as the one approved by the City Council, are taking hold in several areas throughout the country as a means of keeping money-center banks from New York, Chicago and California from overtaking smaller regional banking powers.

In the District, local banking officials and representatives of Citicorp took turns trying to persuade the City Council that they could best serve the District's economic development needs.

Daniel J. Callahan III, chairman of American Security Bank, said after the council vote that services offered by banks here are "superior" to those that could be offered by the New York money-center banks and that it is "ridiculous to think you could get the chairman of Citicorp to listen to the problems of Washington."

In a letter to City Council member Charlene Drew Jarvis (D-Ward 4), the D.C. Bankers Association pledged to contribute between $1.1 million and $1.5 million to the city's newly formed Neighborhood Economic Development Corp. and promised to "take a lead role" in getting other businesses to contribute between $3.5 million and $3.9 million.

Jarvis, chairman of the council's Economic Development Committee, said the council's vote was an attempt to give local banks time to increase their assets and commitments to local economic development projects before being forced to compete with banks like Citicorp.

But Lucius P. Gregg Jr., a Citicorp vice president, said the council vote was an effort to protect local banks and "a vote against neighborhood economic development." Citicorp had offered to provide $100 million in mortgage and business loans in the District in exchange for the right to provide full banking services here.

Cox, who acknowledged that Citicorp has been invited to continue its discussions with city officials, said that the difference between the financial commitment of the local banks and Citicorp's proposal is "the difference between chalk and cheese."

Three council members did not vote on the banking measure. Carol Schwartz (R-At Large) abstained, and John Wilson (D-Ward 2) and Nadine P. Winter (D-Ward 6) were absent.

Banking officials defend mergers as a means of providing more services.

Sovran's chairman, C.A. Cutchins III, said that when Sovran and D.C. National complete their merger, perhaps in the spring, there will be added benefits to customers of both banks. He said Sovran's Virginia customers would be able to use D.C. National's outlets in the District, and vice versa, while the services of the smaller D.C. National would be expanded.

But consumer advocate Alan Fox of the Consumer Federation of America said, "There's a lot more interest by large out-of-state banks in deposit-taking than in making small mortgage loans."

Staff writer Rudolph A. Pyatt Jr. contributed to this report.