Citibank is on the hot seat. It has a choice between being an imprudent banker or losing its biggest investment account -- Kuwait, the second-largest oil producer in the Organization of Petroleum Exporting Countries (OPEC). And the fallout could be a far more explosive and volatile stock market for the nation's nearly 30 investors.

Confidential documents obtained by Chicago Tribune reveal that top officials in Kuwait -- which has entrusted Citibank with the management of close to $7 billion worth of U.S. securities -- are demanding a bold new investment strategy that would turn the bank into one of the most aggressive and biggest stock market traders in the United States. In brief, the OPEC producer -- with $18.6 billion of petro-revenues last year -- is insisting that sizable chunks of one of the largest pools of money in the world actively trade in and out of U.S. stocks as they go up and down.

"We want more gains," Citibank is being told by Kuwait, which is unhappy with the bank's performance.

An internal Citibank memo -- covering meetings held last December between Kuwaiti and Citibank officials -- indicates that the bank is ready to accede to Kuwait's demands, which are described by one market expert as "irrational."

At one meeting (held in Kuwait), Shaikh Salem Abdullah al-Ahmed al-Sabah, the head of American investments for Kuwait and a member of the country's royal family, put it bluntly to Peter Vermilye, Citibank's chief investment officer: Can the bank adjust to a "buy today and sell tomorrow" investment strategy?

More specifically, Shaikh Salem wanted to know if Citibank could adopt a strategy -- which, he said, was being engineered successfully by the Kuwait investment office in London -- of trading 10,000-share blocks of stocks that move up and down within a 2- to 3-point range in a given week.The idea would be to sell at the high and buy the block back when the security dropped 2 to 3 points.

The memo, written by Citibank vice president John J. Klem, reported that another Kuwaiti investment official -- in an equally bold recommendation -- suggested trading 5 percent of each large holding on a weekly basis.

(Both suggestions -- if they came to pass -- would surely accelerate ulcer-producing yo-yo moves in the marketplace).

Shaikh Salem, repeatedly expressing displeasure with Citibank's investment staff for lack of a more aggressived trading posture, heatedly warned the bank's officials that "if nobody is listening, Citi will lose out." He added: "Tell us if you think we're crazy."

In response, Vermilye promised that the bank (which obviously gets huge fees from Kuwait) will be much more active in '81.

The revelation of Kuwait's strong demands on Citibank comes on the heels of earlier disclosures by the Tribune that the big oil exporter had acquired from 1 to over 2 percent of some of the United States' biggest companies -- including K-mart, McDonald's, J.C. Penney, Burroughs and General Mills.

As of last Nov. 28, almost $3.7 billion or 52 percent of Kuwait's securities holdings under Citibank management were in stocks. Additional Citibank documents suggest a much bigger Kuwaiti push on equities -- a position of over $4.8 billion, or 60 percent of the portfolio, by December.

Several Wall Street money men tell me Kuwait's insistence on more aggressive trading of its billions would clearly have a destabilizing impact on an already volatile U.S. market. They argue that Citibank's investment philosophy, which is longer-term oriented, is simply not geared to the in-and-out trading suggested by Kuwaiti officials.

Doubts also are voiced as to whether Citibank -- or any investment biggie, for that matter -- is capable of successfully trading hundreds of millions of dollars in the marketplace on a round-the-clock basis.

Monte J. Gordon, head of research at money-management giant Dreyfus Corp., says Kuwait's investment strategy "borders on the irrational." Kuwait essentially is suggesting that turnover means profit . . . "and that's crazy," he adds. He observes that Kuwait is advocating a turnover rate for its stock portfolios of every 20 weeks . . . "which is way out of sight." It would make Citibank more aggressive than the most aggressive mutual fund, he tells me.

To adhere to such a strategy, Citibank, says Gordon, would have to change totally the character of its investment positions. It would be forced to focus on the things that bounce all over the place -- fast-moving drug stocks, the speculative defense issues and technology. And what happens, Gordon asks, if we enter a period of a declining market? "I just don't think Citibank can do it . . ."