The Kansas City Board of Trade has dropped its controversial proposal to begin trading a futures contract based on the Dow Jones Industrial Average.

Instead they want to trade futures on the Standard & Poors stock average.

The new proposal was sent to the Commodity Futures Trading Commission late Thursday just as the Chicago Mercantile Exchange was announcing its own plans to create a 500-stock average futures contract.

Walter N. Vernon, III, executive president of the Kansas City exchange, said the 500-stock average switch to the 500-stock average was made, "because it seems to be a more widely accepted choice."

The stock index futures are meant to give, big investors a vehicle for hedging their stock portfolio positions against a sudden downturn in the market - as has occurred recently - and the 500-stock index is a better indicator of market trends than the 30-stock Dow Jones index.

"As a practical matter," Vernon acknowledged, the change was made because "we're not in the litigation business."

Dow Jones & Co., which developed the 30-stock index in the 1930's, had forced the Kansas City board to remove the Dow-Jones name from its plan and had threatened legal action to halt use of the simple formula used in computing the average, contending it had a proprietary interest in the method.

Standard & Poors, a division of McGraw-Hill, is "talking friendlier than Dow-Jones" to the use of its index, Vernon said, but has not given permission for the use of its name.

CFTC officials said the changes in the Kansas City proposal wll not necessary delay consideration of the application, which is scheduled for later this month or early December.

During hearings before the CFTC last month economists generally supported the stock index future as a valid economic tool for reducing investment risks, but major objections were raised by government regulators, includiing the Securities and Exchange Commission, and the Federal Reserve.

In response to the criticisms, Vernon said the Kansas City board is raising the margin requirement needed to purchase its contract from $1,500 to $2,000 for hedgers and $4,000 for speculators. New Kansas City rules define hedgers as those in the business of buying, selling and owning securities and make it difficult for private investors to qualify for the lower hedging rate, Vernon said.

The stock futures contract will be valued at 500 times the 500-stock index, which closed Friday at 94.77, making the contract worth about $47,000.

A spokesman for the Chicago Mercantile Exchange said details have not been worked out for its rival 500-stock futures contract, which was announced in Chicago along with three other new futures proposals. The Chicago "Merc" also wants to start trading in futures for future delivery of Australian dollars, Italian Lira and Eurodollars-American cash held outside the country.

The Chicago exchange is expected to propose margins in the $1,500 to $2,500 range for its contract. If both contracts are approved by the CFTC, competitive pressures could result in identical margin rules for the rival products.

Chicago officials said they will propose only cash settlements for their contract. Kansas City is offering either a cash settlement or a basket of units of 100 shares of stocks included in the index, with a total value approximating the value of the index, plus a cash payment to settle any odd amounts.

As a practical matter the majority of settlements will be in cash Vernon said. Only persons who actually own stocks-long hedgers-will be able to demand a settlement in shares.

Chicago Mercantile Exchange officials said their futures contract in Eurodollars is the first of several Eurocurrency futures contracts that will be proposed. Eventually the exchange would like to trade Eurofutures in all eight of the currencies in which it now trades.