With a nudge from a former White House official, the Interior Department is preparing to concede millions of dollars worth of federally subsidized irrigation water to more than 150,000 acres of California farmland never authorized by Congress, according to Rep. George Miller (D-Calif.) and others familiar with the case.

The decision, expected to be offered as part of a negotiated court settlement with the Westlands Water District near Fresno, would reverse the government's longstanding position that the land was illegally placed under irrigation more than two decades ago and has no claim to federal water.

It would be a lucrative victory for Westlands, the largest and most heavily subsidized irrigation district in the federal reclamation system. Water subsidies amounting to nearly $500,000 per farmer have turned the semi-arid valley into a cornucopia producing nearly $2 billion worth of agricultural products annually.

But the district also has been at the center of controversy, most recently when toxic drainage water from its fields compelled the closing of the nearby Kesterson National Wildlife Refuge.

Since 1978, the government has held that Westlands illegally annexed 156,000 acres of land in the mid-1960s, expanding the project far beyond the 500,000-acre service area authorized by Congress in 1960.

The about-face means that the 200 or so farmers in the disputed area will continue to pay $11.80 an acre-foot, or perhaps even less, for water that costs the federal government nearly $60 an acre-foot to deliver. (An acre-foot is enough to flood an acre to a depth of one foot, or 325,851 gallons, about what a family of five uses in a year.)

Interior officials declined to discuss the case, saying there have been several draft proposals and "it would be inappropriate to go into details at this time." Westlands attorneys did not respond to telephone calls.

Miller said the agreement had been cleared by Interior's Bureau of Reclamation, and other sources said the settlement might be offered to U.S. District Court Judge Edward Dean Price in Fresno as early as this week.

If approved by the judge, the agreement apparently would close the books on Westlands' four-year-old lawsuit against the government and would not be subject to further legal challenge.

"The government has simply taken a dive on this agreement," Miller said. "They just made an end run around the courts and Congress."

The goverment's former position was outlined in a legal opinion written under former interior secretary Cecil D. Andrus and was endorsed by President Reagan's first two interior secretaries, James G. Watt and William P. Clark.

According to Miller, the abrupt reversal under Interior Secretary Donald Hodel was engineered by Kenneth Khachigian, a former speechwriter for President Reagan and still a White House consultant.

Khachigian, contacted at his office in San Clemente, Calif., acknowledged that he has been working on the case for Westlands and its farmers for more than four years, but he declined to say whether he had met with Hodel or other administration officials.

"I'm not going to talk about who we spoke with," he said. "These things work best when they go forward as they're supposed to."

Rep. Tony Coelho (D-Calif.), who has long championed Westlands in Congress, denied that an agreement was imminent and said any proposed settlement would have to be cleared by Judge Price.

"The courts will decide whether they feel it's legal and whether they want to go forward with it," he said.

Miller, chairman of the House Interior subcommittee on water resources, said he was informed of the agreement in a briefing by Assistant Interior Secretary Robert Broadbent, who directs the department's water and science programs. Broadbent declined a request for comment.

"It's clear that I'm the skunk at this picnic," Miller said. "You're talking about people who went out and violated the law. Now a friendly administration is saying it's all okay. The lesson is that crime pays."

Environmentalists and small-farm advocates battled the district in court for years, contending that its bargain-basement water rates amounted to a massive windfall for corporate landowners who were violating the 1902 Reclamation Act's acreage limitation for federally irrigated land.

According to Miller, the proposed court settlement also opens the way for Westlands to shift the cost of dealing with its toxic pollution problems to the rest of the Central Valley Project, which supplies electricity and water to a broad area of California.

When Interior threatened earlier this year to cut off irrigation water unless the contamination at the Kesterson refuge was corrected, Westlands agreed to foot the bill for an alternative way to handle its drain water. The settlement, however, describes drainage control as "a main project feature," meaning that all beneficiaries of the massive project would have to pay for it.

"It shifts millions off the back of Westlands to -- that's a good question. Who?" Miller said. "To the power users or the taxpayers. That project is already billions of dollars in the red."