In a fresh controversy over President Bush's "faith-based initiative," the White House backed away from a proposal that would have allowed religious groups to receive federal funds even if they discriminated against gays and lesbians.

Amid intense criticism, officials abruptly ended a review of a proposed regulation that would have exempted religious groups from state and local anti-discrimination laws.

The decision came late Tuesday afternoon, hours after Vice President Dick Cheney and other administration officials said that churches and other religious groups should be allowed to stick to their principles in running secular programs with government money.

White House spokesman Dan Bartlett said senior administration officials reviewed the matter over the course of the day and concluded that religious groups do not need overt protections in order to bypass gay-rights hiring laws.

Legislation now pending in Congress — and being pushed hard by President Bush — makes it clear that any religious group that gets government money may consider religion in making hiring decisions. The courts have said this includes one's religious practices — and for some religions that could mean rejecting job applicants because they are gay.

"That's when you get into definitions that will ultimately be decided by the courts," Bartlett said.

He added that the administration was not backing off Cheney's statement that a group should be allowed to be faithful to its "underlying principles and organizing doctrines" even when it accepts government money.

"The charitable choice law provides adequate protections," Bartlett said, referring to a law used as a model for Mr. Bush's initiative to allow religious charities a bigger share in providing federal social services.

The issue was raised by an internal report from the Salvation Army, the nation's largest charity, which suggested the White House would put forward the regulation in exchange for support of its initiative pending in Congress.

White House officials denied the quid pro quo, but said they were considering the regulation, which would allow religious groups to bypass local and state laws that bar discrimination against gays when the groups take federal dollars.

Gay rights groups, Democrats and civil rights organizations reacted strongly, and by day's end, it was clear that the issue would mean a new round of controversy for Mr. Bush's overall legislation.

"President Bush regularly talks about seeing into the good hearts of people. Does he think that gay people do not have the same good hearts and moral values as others? How else could he support, in the name of faith, taking a position that values gay people less than others?" said a statement from Kirsten Kingdon, executive director of Parents, Families and Friends of Lesbians and Gays.

"It will just deepen opposition and make many of my colleagues more skeptical," Sen. Joseph Lieberman, D-Conn., said before the White House changed course.

Later, Lieberman's spokesman welcomed the change. "This is a reassuring signal after a very disturbing signal and hopefully it means we can now kind of refocus on finding common ground and strengthening rather than weakening civil rights protections," said Dan Gerstein.

Some state and local laws bar discrimination in hiring gays and lesbians. Others require employers to offer health insurance and other benefits to the domestic partners of gay employees. Typically, these laws do not apply to religious groups. But it's not clear whether groups lose that exemption once they accept taxpayer dollars.

The Bush administration was considering issuing guidance from the Office of Management and Budget banning enforcement of these laws for religious groups that get federal dollars, which often pass through local and state government.

The Salvation Army report explicitly linked the regulatory action with the legislation, now pending in the House.

"It is important that the Army's support for the White House's activities occur simultaneously with efforts to achieve the Army's objectives," said the document.

It said White House officials wanted to move the legislation first "and use the political momentum of this" to push through the regulatory change. And it said White House officials believed a regulation was better than trying to move separate legislation on an exemption, "which is more time-consuming and more visible."

It added that the Salvation Army, which operates a national network of social services, would enlist more than 100 of its leaders to lobby members of Congress "in a prearranged agreement with the White House."

The Salvation Army said the report overstated the strategic relationship between the two issues, though spokesman David Fuscus said the regulation is needed. "As a church, the Army does insist that those people who have religious responsibilities, who are ministers, share the theology and lifestyle of the church."