The Interior Department unveiled a proposed legal settlement yesterday that would grant millions of dollars worth of federally subsidized water to a group of California farmers, contending that the agreement gives the government a better deal than it could get in court.

The agreement would end a 20-year dispute over water allocations to the Westlands Water District near Fresno, essentially by granting the district contract rights to all the water that the government once contended was being delivered illegally.

Dave Houston, regional director of the Bureau of Reclamation in Sacramento, said the agreement would "provide economic stability" in the western San Joaquin Valley while avoiding the time and expense of litigation.

With minor exceptions, the proposal is identical to one that was denounced by critics as a "massive giveaway" when Interior officials outlined it last November.

"It's simply not true that this is good for the Treasury," said Natural Resources Defense Council attorney Hamilton Candee. Candee said the agreement would grant Westlands farmers billions of gallons of water at about a third of the cost of delivering it.

According to Candee and congressional aides, the agreement would allow Westlands to negotiate new water contracts without triggering the provisions of the 1982 Reclamation Reform Act, designed to curb huge water subsidies. It is supposed to be triggered by any new water contract.

Under the Reclamation Reform Act, farmers are required to pay the full cost of water used to irrigate more than 960 acres. In the Westlands district, where 5,000- and 10,000-acre farms are not uncommon, that would be about $42 an acre-foot (enough to flood an acre to a depth of a foot, or about 320,000 gallons).

As outlined by Interior officials, however, any new water contracts with Westlands would be negotiated with an "improvement district," a legal device that would allow Westlands to continue paying $16.40 an acre-foot.

"Westlands was the most flagrant example of what was wrong with reclamation law," Candee said. "This is a clear attempt to get around the reform act and a defiance of the will of Congress."

Congress has 30 days to review the agreement but cannot veto it. Rep. George Miller (D-Calif.), a leading critic of the proposal, said yesterday that legislation to block the agreement is unlikely.

"We'll just have to wait and see how it plays out," Miller said. "These pigs have never been able to leave the trough. They'll be back and I'll be waiting for them."

The dispute began in the early 1960s, when the district annexed more than 150,000 acres that was not authorized to receive irrigation water. In 1981, then-Interior Secretary James G. Watt threatened to cut off water to the disputed acreage, prompting the Westlands lawsuit.

The proposed settlement would officially recognize the disputed acreage as part of the district, and Westlands would be guaranteed a supply of water to irrigate it.

The agreement also would commit Interior to seek congressional authorization for more irrigation facilities and a drainage system to replace the ill-fated San Luis Drain, which was abandoned after it was disclosed that toxic drainage water had poisoned a wildlife refuge in the valley.

"It'll be a long time coming," said Miller. "Maybe the secretary will pay for it from his own pocket."