Three years after Congress ordered the Agriculture Department to revamp the nation's convoluted system for setting milk prices, Republican leaders agreed yesterday to send a new message to the department: Never mind.

Senate Majority Leader Trent Lott (R-Miss.) and House Speaker J. Dennis Hastert (R-Ill.) settled on language undoing the department's modest market-oriented dairy reforms and largely preserving the Depression-era "Eau Claire system" that sets milk prices according to distance from Eau Claire, Wis. They also agreed to a two-year extension of the controversial Northeast Dairy Compact, a regional milk cartel that sets prices even higher in New England.

But the last-minute maneuvering faced stiff opposition from the White House, which warned that plans to attach the dairy provisions to a giant year-end spending bill could jeopardize the entire budget deal. "It would create all sorts of obstacles," said presidential spokesman Jake Siewert, who noted that Clinton had promised to veto other spending bills including the milk language.

The upshot of the proposal--which Lott pushed on behalf of Sen. James M. Jeffords (R-Vt.), who is up for reelection in 2000--would be a bitter defeat for dairy farmers in the upper Midwest, a huge victory for dairy farmers in the Northeast, and a status-quo solution to a battle that could have resulted in lower prices for consumers. Sen. Herb Kohl (D-Wis.) yesterday vowed a last-ditch effort to hold up congressional business to block the deal, and he could have assistance from the administration.

"This is a very big thing for us, and I'm going to do whatever I need to do to try to make sure this doesn't happen," said Kohl, who noted that his state has 25,000 dairies, compared with 3,000 for all of New England.

The byzantine Eau Claire system was designed to ensure that every region of the country maintained a local supply of fresh milk, at a time when it was not possible to transport milk long distances in refrigerated trucks. The 1996 farm bill, touted as an effort to introduce free-market principles to America's farm economy, required the Clinton administration to propose a replacement for the Eau Claire regime. And while it authorized the Northeast Compact, it set its expiration date for this year.

Now Congress appears set to change its mind.

The Agriculture Department plan, which was supposed to go into effect last month before it was held up by a lawsuit in Vermont, would have smoothed out the formulas that favor farmers farther away from Eau Claire. Consumer advocates estimated that it would have cut milk prices by at least 2 cents a gallon nationally, saving consumers $185 million to $1 billion a year and saving taxpayers $42 million to $149 million on food programs. But the House passed a bill last month to suspend the new plan, and congressional leaders have agreed to include a version of that bill in the overall budget agreement. And yesterday's deal will extend the compact until February 2001.

Kohl complained that maintaining the status quo would mean maintaining an unfair playing field, providing government protection to help inefficient dairies compete with midwestern farmers. John Czwartacki, a spokesman for Lott, cautioned that no deal is final until the budget agreement is complete, but he suggested that midwestern senators such as Kohl and Rod Grams (R-Minn.), who also is up for reelection, will be unable to stop it.

"It's all done but the fireworks," Czwartacki said. "I'm sure people will voice their unhappiness in tried and true ways. But on this issue, you can't make everyone happy."

Not even the regional alliance of compact supporters--who include likely New York Senate candidate Hillary Rodham Clinton, but not her husband--got everything it wanted. It did not get a permanent extension of the Northeast Compact. And the agreement did not create a Southern Compact. Still, Kohl vowed yesterday to protest the deal by filibustering anything that hits the floor. And Grams warned that he might force the Senate clerk to read the entire budget bill aloud, which could take days.

"We have the government picking winners and losers, and that's wrong," Grams said. "It's the whole country ganging up on the Midwest."

The Agriculture Department proposals, while somewhat more market-oriented that the current system, would have maintained the government's guarantee of a minimum milk price in all regions. But according to Christopher Galen, spokesman for the National Milk Producers Federation, they would have cost dairy farmers across the country about $200 million a year, at a time when prices have dropped precipitously after several good years.

"We know people are upset in the Midwest, but we think this deal would create a rising tide that will lift almost all dairy farmers," said Galen, whose organization took no position on the compacts.

CAPTION: Senate Majority Leader Trent Lott (R-Miss.) favors undoing Agriculture Department's dairy pricing reforms.