The government's index of leading economic indicators rose 0.5 per cent in April, providing further evidence that the economy will continue to expand in the months ahead.

In another development, several of the nation's major banks - including Citibank and Chase Manhattan in New YOrk and Continental Illinois in Chicago - boosted their prime lending rates from 6.5 per cent to 6.75 per cent.

The increase in the prime rate, the interest banks charge their best corporate customers for short-term loans, had been expected and reflects increases in other short-term interest rates.

Short-term rates had been rising in response to a tightening of monetary policy by the Federal Reseve Board, concerned that the money supply was growing too fast. But short-term rates fell yesterday. Money market observers have saif that the Fed did not tighten up on money policy as much as had first been thought.

Office of Management and Budget director Bert Lance has been critical of prime rate increases. He told a convention of the American Iron and Steel Institute Thursday evening that he saw no reason why banks ahould raise their prime lending rates because they are "awash with cash."

A spokesman for Lance said the OMB director's attitude has not changed since Thursday night.

Business loan demand has remained soft in New York City, where most of the nation's biggest banks are located, but in other parts of the country demand for funds by corporations has been growing.

The 0.5 per cent increase in the Commerce Department's index of leading economic indicators was the third consecutive rise. The index fell in January by 1.3 per cent, mainly because of the severe cold weather and fuel shortages which temporarily disrupted the economy.

The Commerce Department also revised upward from 1.4 per cent to 1.9 per cent the increase the index registered in March. Much of that jump was because of a rebound from winter.

The agency said that four of the 10 indicators available for April rose - contracts and orders for plant and equipment, the number of companies reporting slower deliveries, changes in sensitive prices and real money balances.

Five indicators fell, including the length of the average workweek, the change in cash-like assets, stock prices, new orders for consumer goods and building permits. The layoff rate was unchanged. Net business formations and the change in investories were not available to compute the preliminary index.

The index of leading economic indicators is designed to foreshadow economic developments. Most economists forecast continued economic growth in the last half of the year, although not as fast as the 6.4 per cent rate at which the economy expanded in the first quarter. That should mean continued declines in joblessness. The unemployment rate was 7 per cent in April.

Other banks can be expected to follow next week with increases in their own prime rates, although sluggish loan demand in New York City may make some New York banks reluctant to follow Citibank and Chase.