What would become the largest bank merger in American history is being challenged here by California community action groups that already have successfully contested two bank mergers during the past year, blocking one and obtaining concessions in the other.

The proposed takeover of the nation's eleventh largest financial institution, Crocker National Bank, by the British-based Midland Bank has been stalled by a formal protest filed with the Federal Reserve Board by Public Advocates Inc., a San Francisco public interest law firm.

The merger proposal announced last July would entail the purchase by the Midland Bank of 51 percent of Crocker stock at a cost of $495 million. The financial institution that would result from the merger would have U.S. assets of $31.1 billion, according to Crocker officials.

The proposed merger elicited a storm of protest from community activists in San Francisco. The activists charge that the acquisition would contravene a 1978 Supreme Court ruling that empowered the government to block bank mergers that it deemed not to be in the public interest.

Opponents of the merger allege that Crocker historically has engaged in the outlawed practice of "redlining" -- the consistent refusal by financial institutions to lend money in areas they consider to be economically deprived. The deal even has been termed an "unholy alliance to oppress the poor" by John Maher, an activist who runs a drug rehabilitation center called Delancey Street.

"There are 8 million ethnics in California whose interests are not being served by this takeover," said Robert L. Gnaizda, a member of Public Advocates Inc.

Crocker Bank officials categorically deny that they have engaged in red-lining and say they have never even been challenged in court on the issue.

The protest has resulted in the Federal Reserve Board scheduling an unprecedented public meeting tomorrow morning at its San Francisco headquarters to allow a full airing of public comment on the issue. Representatives of 38 community organizations are expected to speak.

"This is rare, very rare," admits a Federal Reserve Board official who said he could find no precedent for such a public meeting.

Critics of the merger, who say they have scrutinized eight volumes of data on the transaction, have vowed to fight until the banks either abandon the effort or promise to pour dollars into local depressed areas. Community activists say they fear that the merger with a foreign bank will mean that American dollars will be sent abroad to further Midland's interests rather than being spent on projects of local benefit.

Public Advocates charge that nowhere in the bank's proposals "is there even a scintilla of information, a wisp of a promise, that [the banks are] committed to serving the underserved needs of the 40 percent of California's population that is minority."

Opponents of the merger also level strong criticism against the banking policies of Midland Bank, charging that the institution has engaged in sectarian hiring in Northern Ireland and racial discrimination in Great Britian.Four Irish businessmen and a group of black businessmen from London are expected to testify against the Midland Bank at tomorrow's meeting.