Expatriate staff had threatened to sue the Government for denying them equal access to public service, which is stated in the Bill of Rights.

It is understood the Government realised there was little chance of winning such a case after seeking legal advice locally and overseas. A ruling against the Government could have meant up to $100 million in damages for ''wrong dismissals''.

A senior government source said it would also be dangerous for the court to make policy for the Government.

There was no guarantee on what the judges would decide, as they were not experts on civil service matters, the source said.

''The court could come up with decisions which were impractical or totally unacceptable to us,'' he said.

''That would open a floodgate under which all overseas agreement officers [contract staff] might be allowed, for example, a further five-year contract.'' The revised policy requires expatriate contract staff to demonstrate their commitment to the territory by applying to become a British Dependent Territories citizen. This normally requires at least a five-year stay in Hong Kong.

Other criteria for a transfer include service need, satisfactory conduct and performance, and physical condition.

All transfers will be to local agreement terms at this stage, while the possibility for a permanent and pensionable transfer has yet to be discussed and may be subject to talks with the Chinese side of the Sino-British Joint Liaison Group. In such a case, proficiency in Chinese will become a factor.

Yesterday's move raised concern from local Chinese officials, who stressed they had not been consulted about the changes.

A vice-director of Xinhua (the New China News Agency), Zheng Guoxiong, said they had taken note of the local staff unions' strong reaction.

He reiterated that the Hong Kong Government should not make ''any major policy changes'', including those concerning the civil service system, during the transitional period.

Mr Zheng said the Government should discuss with Beijing any major changes.

Allan Roger, the chairman of the Association of Expatriate Civil Servants, which has fought hard for the new policy, welcomed the Government's decision.

Concerning the dissatisfaction of their local counterparts, Mr Roger said: ''The issue is now finished . . . We would be saddened if local civil servants are angry. We hope our co-operation will continue as in the past.'' Local civil servants branded the decision ''a total neglect'' of their career prospects and claimed their future promotions could be blocked as a result.

Chairman of the Senior Non-Expatriate Officers' Association, John Luk Woon-cheung, said the change was tantamount to abolishing the localisation policy and would seriously affect morale.

''The decision will ruin the stability of the civil service and threaten the smooth transition in the run up to 1997,'' he said.

''We will fight against the plan to the end, and we will not rule out the possibility of suing the Government.'' While admitting the scheme would affect local officers' promotion, the source stressed that fewer than 100 overseas agreement officers would be interested in or needed a transfer.

Of the 1,400 overseas staff on contract terms, only 60 per cent can fulfil the residency requirement. There are another 700 expatriate staff on permanent terms.

The scheme is likely to most affect the Legal Department and the police as there are a substantial number of expatriates on agreement terms.

The Secretary for Civil Service, Anson Chan Fang On-sang, said the Government had taken into consideration the overall interests of the civil service and the community.

''There is no reason why simply because an overseas officer was first appointed on overseas terms he should not be allowed to switch to local terms, in view that the circumstances have changed over the years,'' she said.

Local Crown Counsel Association chairman Michelle Tsang Kin-mei expressed disappointment at the decision and said it would impede the progress of localisation and affect staff morale.

''Of course, some of the local civil servants could tolerate the situation but some may leave for the private sector, which can provide a better employment package and prospects,'' Ms Tsang said.

She said the new policy would also affect locals taking up senior posts after 1997.

''This is a time when the Government should actively train the future SAR's [Special Administration Region] senior civil servants and not retain expatriates,'' she said.

The chairman of the Expatriate Inspectors' Association, David Scott, said they would not recommend members sign over to local terms, as it was an individual choice.

Some expatriates are also sceptical of the plan, saying that although it gives them a better job guarantee against the threat of localisation, they could suffer a loss in money terms (see chart).

In a letter to the Senior Civil Service Council yesterday, Mrs Chan reassured local staff of the Government's total commitment to localisation.

''The Government remains firmly committed to the localisation policy. The major tenets of the policy remain unchanged, ie giving preference to local candidates in recruitment and replacing officers on overseas agreement terms with suitable officers on local terms as and when the latter become available,'' she said.

Mrs Chan explained that the change would not affect the makeup of principal officer posts in the future SAR Government, as they would be filled only by Chinese nationals who were permanent residents with no right of abode elsewhere.

The head of the Law Department at the University of Hong Kong, Professor Raymond Wacks, claimed the decision might have been prompted by the possibility that the Government was afraid of losing the case in court.

''It would be an arguable case and it's a pity the Government has decided not to go to court.'' He said that, on the surface, expatriates given better terms of condition were already in breach of the Bill of Rights because it discriminated against locals.

Professor Wacks was concerned that the change could have far-reaching effects on the Hospital Authority and tertiary education institutions, which also have different terms for overseas and local staff.