Lt. Col. Victor Fehrenbach reached the agreement with the U.S. Department of Justice and the Air Force, the Dayton (Ohio) Daily News reported Tuesday.
Fehrenbach's attorneys said the deal prevents his immediate discharge, recommended under the "don't ask" policy prohibiting openly gay men and women from serving in the military.
With the dismissal recommendation being considered by Air Force Secretary Michael Donley, Fehrenbach's lawyers filed for a preliminary injunction last week in U.S. District Court in Idaho, arguing the discharge would violate his constitutional rights.
Fehrenbach, 40, is eligible for his 20-year military retirement in September 2011.
Servicemembers Legal Defense Network, an advocacy organization for gay and lesbian soldiers and veterans, is representing Fehrenbach in his legal battle.
"The agreement recognizes the immediate harm to Lt. Col. Fehrenbach and ensures that he will eventually get to make his case at a full-blown hearing without losing his job," said Aubrey Sarvis, the network's executive director.