NEW YORK (AP) _ The federal government on Thursday removed a major obstacle to the sale of Trans World Airlines to its creditors and employees, lifting a demand that the carrier first settle a $1.2 billion pension fund shortfall.

Under an agreement with the federal Pension Benefit Guaranty Corp., TWA would pay small part of the shortfall over 15 years. In the meantime, the PBGC, the government agency that guarantees pensions, would pursue TWA chairman Carl Icahn and his other businesses for the entire $1.2 billion deficit.

The agreement was reached Thursday morning and presented later in the day to U.S. Bankruptcy Court in Wilmington, Del., where TWA is undergoing reorganization. The pension agency told the court Icahn hasn't made a serious offer to make up the deficit.

''His inability to make a reasonable offer made it a better option'' to continue trying to settle the deficit after the reorganization, James B. Lockhart, executive director of the pension agency, said from Washington.

To maintain its claim against Icahn after he sells the airline, the PBGC plans to take control of the two underfunded pension plans before the reorganization is complete.

Attorneys told the court they expect to confirm the reorganzation plan by the end of January, meaning TWA could leave bankruptcy court a short time later.

Once the PBGC takes over the pension plans, most TWA retirees won't see any change in their pension payments. But others, mostly former pilots, whose benefits exceed those guaranteed by the pension agency, will see a reduction.

The pension agency guarantees benefits up to $2,353.27 per month for those who retire at age 65. The amount is lower for younger retirees. For instance, those who retire at age 55, as many pilots do, cannot receive more than $1,058.52 once the pension agency takes over the plan.

An agreement between TWA and the pension agency was the last major issue to be settled before the airline could move forward with its reorganization. TWA must still work out some minor details with creditors. The carrier does not need a settlement between the PBGC and Icahn to complete its reorganization, lawyers said in court Thursday.

The pension agency said it hopes that by settling the retirement fund issue, TWA will be able to get financing to keep flying.

''It will provide financial flexibility instead of an annihilating claim,'' James Spiotto, attorney for the creditors said of the agreement in court Thursday.

Icahn, who owns 90 percent of TWA, agreed to sell the airline to unions and creditors in August in return for drastic cuts in expenses. Employees, who would get 45 percent of the airline, are giving up 15 percent in wages and benefits. Creditors have agreed to forgive two-thirds of TWA's debt in return for a 55 percent stake.

The concessions by employees and creditors would lower TWA's costs by about $350 million a year.

Members of all three of TWA's major unions recently ratified the plan.

TWA, which filed for bankruptcy court protection in January, was given another extension of its deadline to file a reorganization plan on Thursday. U.S. Bankruptcy Judge Helen Balick gave the airline until Nov. 30 to file its plan.

TWA's 15-year commitment to repay part of the pension shortfall would be secured by the airline's international routes and its Kansas City maintenance base.

The maintenance base is not considered a significant asset and with the prospect of freer access to foreign airports under ''open-skies'' treaties, the international routes become less valuable.

The pension agency would not disclose other terms of the agreement, but said it was worth more than $150 million, the portion of the underfunding that has been attributed to TWA, rather than Icahn. Lockhart said the portion TWA would pay is small in comparison to the $1.2 billion figure.

Pension agency officials had earlier rejected a proposal to post the TWA operations as collateral because the agency did not want to be put in the position of drastically limiting the carrier's operations to collect.

On Thursday, Lockhart said the deal's structure gives TWA some flexibility in the early years and expects the airline will be healthy enough later in the term that the agency won't need to foreclose on the assets.