It's because you're not using quotes in your SET statement. When you enter "r r r" as your input, the two different variants (unquoted and quoted) are equivalent to:
set TEST=$< :is equivalent to: set TEST=r r r
set TEST="$<" :is equivalent to: set TEST="r r r"
The first of those simply sets TEST to "r" and r to "" (twice!). The second sets TEST to "r r r". That's because csh lets you do multiple assignments like:
set a=1 b=2 c d=4
So you need to use the quoted variant of SET. Examine the following transcript to see how it works:
[pax ~]$ set x=$< ; echo .$x.
hello
.hello.
[pax ~]$ set x="$<" ; echo $x ; echo .$b.$c.
a b c
.a b c.
b: Undefined variable.
[pax ~]$ set x=$< ; echo $x ; echo .$b.$c.
a b c
.a.
...
[pax ~]$ set x=$< ; echo $x ; echo .$b.$c.
a b=7 c=urk!
.a.
.7.urk!.
The reason you're getting the error you describe with input of "1 1 1" is because you're effectively executing:
set TEST=1 1 1
and csh is taking this to mean that you want to create the variable TEST set to "1" followed by the variable 1, which doesn't start with a letter, hence not allowed. With the quoted variant, this becomes:
set TEST="1 1 1"
which will do what you expect.