PEORIA, Ill. (AP) _ A gym teacher fired for showing classes a videotape of scantily clad male dancers for a lesson on aerobics has dropped her fight to be reinstated in exchange for $69,000 in back pay and benefits, her lawyer says.

In exchange for $60,000 in back pay and retirement benefits and $9,000 in medical disability pay, Alice Zook will stop challenging her 1984 dismissal and resign, attorney Michael Radzilowsky said Wednesday.

Limestone High School in Bartonville, just south of Peoria, also agreed to drop an appeal of a court's order that it reinstate Mrs. Zook, 50.

The 20-year teacher was fired in April 1984 for showing a tape, ''Muscles in Motion,'' to more than 100 high school girls. The male dancers are clad in tight shorts or blue jeans, no shirts and bow ties.

''After all that the school board did to her, Alice decided she didn't want to go back and teach there anyway,'' Radzilowsky said.

The school board ratified the settlement Tuesday night, said president Dean Briggs. The board had accused Mrs. Zook of incompetence and insubordination , and of letting students who liked the video intimidate two girls who had complained about it.

Mrs. Zook and the Illinois Federation of Teachers challenged the dismissal on grounds she had a First Amendment right to show the tape, that the school board lacked grounds to dismiss her, and that officials failed to meet requirements for any firing.

Lawrence Cohen, a State Board of Education hearing officer, ruled in Mrs. Zook's favor in November 1984, but also said the video was improper for classroom viewing by high school girls.

The school appealed, but a Peoria County judge last August upheld Cohen's decision. The school's appeal to the state appellate court at Ottawa will be dismissed, Briggs said.

2-12-85 0055EST