RENTON, June 7 - Ending weeks of political brinkmanship by Democrats, legislative leaders reached an agreement on Monday on a plan to restrict development on 400,000 acres in the northwest section of the state known as the Highlands.

The bill, which conservationists have called New Jersey's most significant environmental initiative in a generation, would sharply curtail construction near the rivers, lakes and reservoirs that provide drinking water to half of the state's nine million residents. Despite the endorsement of Gov. James E. McGreevey and four former governors, the plan was stalled in committees this spring by construction industry lobbyists and a few Democratic lawmakers from South Jersey who complained their region was being slighted.

As the objections dragged on, Governor McGreevey threatened late last month to bypass the Legislature and enact the plan by issuing an executive order. But a compromise was reached this weekend, when the administration agreed to provide property tax relief to some residents of the Pinelands, a protected area in South Jersey, and support new legislation that will force the State Department of Environmental Protection to streamline the process of approving building permits.

The bill cleared committee in both houses on Monday, and is expected to win approval by the full General Assembly and State Senate by next week. Environmental advocates said the regulations were the most sweeping since the state protected the Pinelands in the 1970's and would help safeguard New Jersey's drinking water supply for generations.

"It's not about all the politics and back-room stuff," said Jeff Tittel, president of the New Jersey chapter of the Sierra Club. "It's about protecting drinking water."

Mr. McGreevey, who was elected on a promise to curb suburban sprawl and hopes to highlight his environmental record when he seeks re-election next year, said he was gratified that lawmakers had been able to reach a deal. Although some developers had warned that their businesses would be damaged and housing costs would spike, the governor said, "Preserving the Highlands is good for the environment, good for the economy and good for our state."

The Highlands is a band of rural and densely wooded land that covers 800,000 acres and sprawls across parts of seven north Jersey counties. Several years ago, the United States Forest Service found that more than 3,000 acres per year were being lost to development, and a commission appointed by Mr. McGreevey found that runoff from new construction in the area was threatening the state's drinking water supply.

The governor's plan sets aside 395,000 acres on which virtually no development would be allowed, and identifies 145,000 acres of nearby land for limited development. Some northwest New Jersey lawmakers said the plan was heavy-handed and would drive down the property values and create sprawl in communities abutting the protected area.

"I do not understand the rush to impose these burdensome and destructive regulations on communities that have successfully managed sprawl in this region for years,'' said Assemblyman Guy Gregg, a Republican from Sussex County.

But David S. Pringle, campaign director for the New Jersey Environmental Federation, said lakes and reservoirs in the area were in danger because suburbs have been expanding so rapidly in recent years.

"It's the drinking water for more than half the state, it's 30 miles from New York City and it's already under massive pressure from developers," he said.

Senator Stephen M. Sweeney, the Gloucester County Democrat who had delayed the legislation, said,"The battle was worth it because we righted some of the wrongs of the Pinelands Act.'' He added, "We achieved greater equity for South Jersey, put controls on property taxes, protected the rights of homeowners and improved the long-term effectiveness of the Highlands plan.''