House and Senate negotiators reached a tentative agreement yesterday with administration officials to overhaul the federal pay system by linking employees' pay to local labor markets with the aim of closing the public-private wage gap within 13 years.

The plan, according to congressional sources, would boost civil service salaries across the board by as much as 5 percent each year from 1992 to 1994. Beginning in 1994, federal workers in high-cost cities, such as Washington, would also receive extra wages in an effort to begin to close the pay gap between the public and private sectors. Currently, employees of equal rank on the federal pay scale receive the same pay, regardless of where they live.

The president's pay adviser this year reported that government wages had fallen an average of 30 percent behind comparable private-sector salaries.

Administration officials pledged to commit $3.6 billion over the next five years to fulfill provisions of the pay overhaul plan, but have said half of that must be absorbed by departmental and agency budgets. Congressional sources said last night that the funding formula was still under negotiation.

"I think we're there for the most part," said Rep. Steny H. Hoyer (D-Md.), the chief congressional negotiator. "It is a good agreement . . . a step forward."

On Tuesday, appropriations conferees approved a 4.1 percent federal pay increase for 1991, effective Jan. 1. President Bush had recommended a 3.5 percent annual increase.

The pay reform package that would begin in 1992 is the culmination of several years of study by civil service experts across the political spectrum who have concluded that the federal government's ability to recruit bright, new employees and retain the most qualified experienced workers has been greatly harmed by a growing disparity between what government and private industry are willing to pay their employees.

The proposal, which the sources said was tentatively approved yesterday by Office of Management and Budget Director Richard G. Darman in negotiations with Hoyer and congressional aides, must be adopted by the Treasury, Postal Service and General Government Appropriations conferees. The conferees plan to meet today on the matter.

The White House and the OMB last night declined to comment on the negotiations.

Federal employee unions, which lobbied hard for the agreement, have approved the plan.

"I think it's a breakthrough," said John N. Sturdivant, president of the American Federation of Government Employees. "It's an exciting opportunity to rebuild worker morale and rebuild government services to the American people."

Under the proposal, in 1992 and 1993 civilian federal workers covered by the General Schedule pay scale would receive an annual raise equal to the government's Economic Cost Index, up to 5 percent. The ECI measures the change in white-collar, private-sector wages, excluding sales. In 1994, the workers would be guaranteed an annual wage based on the ECI minus .5 percent, up to 5 percent.

The plan, which represents the most drastic change to the federal pay system in 20 years, begins to redress the difficulties of employees living in high-cost cities in 1994. In that year, employees living in areas of the country where private-sector wages are above government salaries, would receive an extra salary increase that equals 20 percent of the gap in their region as measured by the Bureau of Labor Statistics in consultation with an employee-management advisory group.

For example, if the gap between government and private wages for a federal attorney in Washington is 20 percent, then in 1994 that attorney would receive a 4 percent salary increase on top of his regular ECI-adjusted wage.

Beginning in 1995, and in every year for the next nine years, the remaining gap would be closed by 10 percent.

The biggest stumbling block during months of negotiations has been Congress's request that the president surrender some of his authority to set the annual pay raise. Not since 1978 has a president granted the annual salary increase recommended by his pay adviser.

Under the tentative agreement, the president in 1995 would regain his full authority to alter the annual increase and the locality adjustment.

Congressional and administration sources have said they believe the president is committed to locality-based pay because it will make the system more equitable and enable the government to improve the quality of its workforce.

"The administration is serious about closing the pay gap," said a congressional aide who has worked closely on the bill. "They recognize this is a real problem. To expect the president to surrender his authority for more than four years is too much."