The Interior Department agreed yesterday to set aside its controversial 1995 denial of a gambling casino license for three Wisconsin Indian tribes and to reconsider their application under guidelines giving them a chance to remedy any shortcomings.

The agreement, approved by tribal leaders, government lawyers and the head of the Bureau of Indian Affairs, was filed in federal court in Madison, Wis., with the aim of dismissing a lawsuit that the three small Chippewa tribes brought against Interior Secretary Bruce Babbitt and three top aides.

They accused the department of failing to consult with them properly and claimed the denial was influenced by the prospect of large political contributions from tribes that feared the Chippewa plan would cut into their gambling profits and who hired a number of high-powered lobbyists to defeat it.

The lawsuit was financed by the owner of a failing dog track in Hudson, Wis., who had teamed up with the Chippewa in hopes of installing slot machines to draw more customers, but the litigation was set aside for the duration of an investigation of Babbitt's conduct in the controversy by independent counsel Carol Bruce.

Bruce has yet to submit her final report, but she announced last month that she would not seek indictments against Babbitt or anyone else. Tribes opposed to the Hudson casino tribes gave more than $350,000 to the Democratic National Committee and other Democratic causes for the 1996 campaign, but Bruce said the evidence would not support "a finding of a criminal quid pro quo--an explicit agreement between any opponent of the casino application and any government official involved in the Hudson decision to perform an official act in exchange for a political contribution."

She also said that "evidence was insufficient" to prove that Babbitt committed perjury in congressional testimony about the matter.

U.S. Attorney Peggy A. Lautenschlager of Madison said yesterday that settlement discussions began in July, before Bruce's decision, because "the parties on both sides were anxious to resolve this matter." Washington lawyer Michael K. Lewis served as mediator.

Under the agreement, which a federal judge will be asked to approve Friday, the Interior Department will provide the tribes with a detailed listing of all issues that might result in rejection, including "potential environmental impacts" and financial arrangements with dog track owner Fred Havenick of Miami. The tribes will be guaranteed "open, candid and timely discussions" with the department in attempting to resolve those issues. They had said they were never given this opportunity before their application was rejected July 14, 1995.

Officials also agreed to "take into account" that a gambling establishment is already located on the Hudson site and said "the mere fact of competition by the proposed casino with casinos of other tribes" would not be "determinative."

Mark Goff, a spokesman for the Hudson casino partnership, said his group is optimistic about "a favorable outcome," perhaps by next summer. Interior Department spokeswoman Stephanie Hanna said opponents of the casino will be given an opportunity to comment. She said the tribes have already received a letter listing outstanding issues and have agreed to dismiss their lawsuit.