WINDOW ROCK, ARIZ., OCT. 29 -- A precedent-setting but painful clash of cultures between two powerful institutions of the desert Southwest was settled in a Navajo Nation courtroom today with an agreement that a full-blooded Navajo youngster will continue to live with the white Mormon couple who adopted him six years ago.

The settlement of the 5-year legal battle means that Michael Carter (or Jeremiah Holloway, his Navajo name), a shy 10-year-old with jet-black hair and an irresistible grin, will become the permanent ward of his white, adoptive parents, Dan and Patricia Carter.

But legally he will be the son of his biological Navajo mother, Cecilia Saunders, and she will have specified visiting rights.

The resolution is a good news for Michael. He says he does not want to leave his home and church in the small, heavily Mormon town of Spanish Fork, Utah. He has lived there since Saunders gave him up for adoption in 1980, and he and his white parents have vigorously resisted her legal efforts to turn the adoption aside.

But the Michael/Jeremiah case also is an important milestone for the Navajos and other Indian nations because it gives new importance to the Indian Child Welfare Act, a 1978 federal law aimed at curbing precisely what happened in this case: the adoption of Indian children by nonIndian families off the reservation.

During this case, the courts of the United States agreed that tribal courts of the Indian nations have final jurisdiction over such adoptions. In a sense, the 10-year-old who came to the courtroom here carrying a pocket video game to pass the time has had to bear the weight of a century-old dispute between the Mormon church, the Great Basin's most pervasive religious and political force, and the Navajo Nation, the largest Indian tribe in America.

Efforts by the Mormons and the Navajos to work out a coexistence in this parched land have been hampered by fundamental cultural differences.

The Navajos believe in an extended family, with children often raised by neighbors or relatives; the Navajo word for "aunt" means roughly "another mother." On religious matters, the Navajos tend to follow tribal beliefs in their community and let outsiders go their own way.

The Mormons, since renouncing polygamy in the 19th century, have placed great emphasis on the nuclear family: father, mother and children sharing a home and a faith. And the Mormons are great proselytizers, with a mission to convert others to the faith.

Mormon missionaries have been working among the Navajos for about 100 years. One Mormon outreach program that has been controversial on the reservations is the church's Indian Student Placement Service, in which Indian youths are sent to largely Mormon boarding schools off the reservation.

The events that allowed Michael Carter/Jeremiah Holloway to be torn between two worlds stemmed from that Mormon program. He was born to an unmarried, unemployed Navajo teen-ager in 1977. In the Navajo manner, he spent much of the first three years of his life with aunts and grandparents. By the standards of white America, his life was neither secure nor stable.

This was distressing to Michael's aunt, Polly Ann Kirk, a Navajo who had been converted to Mormonism through the student placement service. She arranged for the child to be adopted by the Carters, who had been unable to have children. At Kirk's urging, Michael's natural mother signed Utah adoption papers without consulting a lawyer or tribal officials.

But that 1982 adoption was -- as state and federal courts would later hold -- illegal. Although none of the parties knew it at the time, the adoption was controlled by the Indian Child Welfare Act of 1978.

Congress had passed the law in response to Indian complaints about the high number of off-reservation adoptions approved by state courts. To stem what it called the "wholesale separation of Indian children" from their families, Congress decreed that no such adoption could be legal unless a tribal court concurred.

Two years after giving up her son for adoption, Saunders changed her mind. The Carters' lawyers said she was pressured to do so by Navajo leaders eager for a test case. Saunders will not comment.

In any case, a social worker went to the Carters' door in Spanish Fork in 1982 and demanded Michael's return. That prompted a topsy-turvy legal battle that concluded this fall when the U.S. Circuit Court of Appeals in Denver agreed that the adoption was invalid. In a victory for the tribes, the ruling established clearly that Indian adoptions are matters for the tribal courts, not state laws, to resolve.

This week, all the parties gathered for a three-day hearing in the children's court at the Navajo national capitol complex, just below the spectacular rock formation that gives this capital city its name.

As is common in custody cases, there were dueling psychiatrists. A specialist retained by the tribe said the youngster might prefer his Mormon life style today but later would suffer greatly because of the separation from his native race and culture. The Carters' expert replied that there could be serious damage if the child were removed from the home he has grown to love.

This evening, Navajo Judge Calvin Yazzie and Michael's white and Indian parents all agreed on a settlement. Michael is recognized to be the son of Cecilia Saunders, but he will live under the guardianship of the Carters in their house. Reflecting the two strains of his life, he will have a new name: Michael Holloway Carter.

Commenting briefly afterward, Indian and white parents all said they were pleased with the result. Asked his opinion, Michael said he would like to go home and watch a football game.