The agreement with developer Playa Capital Co comes just three weeks after DreamWorks threatened to pull out of the development in a dispute with the land's owners.

The site for several years has been a focus of concern among environmental protesters, who fear development could upset the ecological balance of an area that is home to many breeds of water birds and other wildlife.

According to both parties, more than half the 1,087-acre Playa Vista site will remain open space, including a restored Ballona Wetlands. The parties say the development will "improve the habitat for many species of flora and fauna," create a freshwater marsh and restore a portion of Centinela Creek to a natural state.

The parties will now focus on completing definitive agreements by earlynext year, with the first sound stages to be ready for use by DreamWorks toward the end of 2000. Although DreamWorks will have priority use of the studio, it will also rent out facilities to other production companies.

Industry experts say DreamWorks needs to have a strong filmdivision to feed its music and other operations if it wants to challenge rivals like Walt Disney Co and Time Warner Inc. Establishment of the Playa Vista studio will give the upstart company not only a physical presence in the area but the cachet of being a major player in Hollywood, where its latest film, "Antz," opens next month.

"We are pleased to have taken a major step closer to a final agreement that will bring DreamWorks to Playa Vista," said DreamWorks principal Jeffrey Katzenberg, the former Disney executive who founded the company with director Spielberg and recording executive David Geffen.

"There is still a lot of work to be done to complete this transaction. Playa Vista's principals have assured me personally thatthey will commit the time, energy and resources necessary to bring this to a rapid conclusion."

Peter Denniston, president of Playa Vista, told Reuters:

"Jeffrey Katzenberg's reputation for being a tough negotiator is well-founded.

"Agreeing on this term sheet represents an important step toward the achievement of one of our highest priorities and marks another milestone along the road to the building of Playa Vista."

Initial building work has already begun at Playa Vista, on the Pacific coast South of Marina del Rey, some 15 miles from downtown Los Angeles. The site will include a mix of residential housing ranging from "affordable" homes to ones costing more than $1 million.

There will also be office and commercial space and an entertainment, new media and technology campus, with open spaces and recreational amenities, all set alongside the restored wetlands and wildlife preserve.