The manufacturer of more than 1 million 1974 through 1979 Volkswagens and Audis misled owners by failing to disclose possible engine problems caused by high rates of oil consumption, the Federal Trade Commission charged yesterday.

The repairs necessary to correct the valve problem in the affected cars, which all have water-cooled engines, could cost $400 or more. In some cases, the engines fail entirely on the open road, potentially forcing the cars' owners to buy an entire engine, repairs that cost as much as $2,000 an FTC staff member said.

After administrative and court proceedings, the FTC action -- its first such case against a foreign auto manufacturer -- could result in refunds to consumers. The case was brought against both Volkswagenwerk AG, the German parent company, and Volkswagen of America Inc., a wholly owned subsidiary.

The complaint involves engines produced from 1974 to at least 1979 in VW Rabbits, Dashers, Sciroccos and Audis. Not covered by the suit are VW vans and the Beetle, which have air-cooled engines.

Linda Colvard Dorian, the acting deputy director of the FTC's Bureau of Consumer Protection, advised owners of the VW models covered by the suit to keep receipts for these repairs, check the oil with every purchase of gasoline, and consult with a mechanic about the condition of the parts in question.

Dorian also said that the FTC staff believes the valve problem may have been alleviated beginning with the 1980 model year.

In a prepared statement, the American subsidiary noted that the company has not formally analyzed the complaint but denied the allegations. "We are confident that the charges against WVoA are without factual foundation or legal suport," the company said.

"In the areas covered by the FTC proceeding, VWoA has provided customers not only with all information required by law, but also with specific advice and practical assistance far beyond that legally required," the company said. "VWOA has fully lived up to its warranty commitments to its customers in every way possible.

The problems cited by the FTC involve a condition in the valve assembly of the engines. The FTC said that the complaints filed with the commission indicate that the defect causes oil consumption to increase to one quart for as little as 200 miles after the car has logged 20,000 miles to 40,000 miles. According to the FTC, a Volkswagen owners manual says normal oil consumption is 2 1/2 quarts for every 1000 miles.

Dorian said oil leakage in the valve system causes a carbon buildup that destroys the valve, potentially leading to an "engine seizure," or shutdown of the entire engine apparatus. "The driver may have only a few seconds of warning before the engine seizure occurs," she said.

The commission approved the complaint by a 4-1 vote and asked Volkswagen representatives to appear before an FTC law judge on May 19. After an initial order by the law judge, either the FTC staff or the company can appeal the decision to the full commission. If not, the decision becomes effective 30 days later.

If the charges are upheld, the commission could order the company to notify owners and buyers of new Volkswagen cars about the oil problems. The commission also could go to federal court to seek an order requiring refunds for owners of the cars.