Last Monday's shutdown of the federal government has left many area merchants nervous that their already sluggish sales may not pick up as much as they had hoped this Christmas season.

Around the city, retailers say they are "cautiously optimistic" that sales, in decline during the last two months, will begin a reversal today, the start of the busiest shopping season of the year.

Yet, store officials acknowledge that their optimism has been sharply tempered by the unresolved dispute between Congress and the president over federal funding levels. If the dispute continues and the threat of another furlough for government employes remains through much of the Christmas season, store officials fear their sales may suffer.

"Monday kind of scared us," said a spokeswoman for Woodward & Lothrop Inc. With sales "running below projections, not doing as well as we had hoped," the chain is counting on a rebound during the holidays, when Woodies does at least 50 percent of its business for the year, she said. However, after Monday, "we just don't know."

This unknown is a critical one for all retailers, who chalk up approximately 40 percent of their earnings during the Christmas season.

"If you don't get in a strong cash position in November and December, it makes for a hard year ahead," one concerned retailer said this week.

The furloughs, "coupled with the other concerns about government RIFs reductions in force may certainly have some detrimental effect on consumer purchasing," commented Frank H. Rich, owner of Rich's Shoe Stores.

As a result, Rich predicted, "it's going to be a practical Christmas for the rank and file person of this community. The money spent will be for things people really need, not for frivolities."

Financial analyst Jeffrey Edelman, a first vice president of Dean Witter Reynolds, agreed. "Santa Claus will come this year, but maybe he'll bring the same size bag as last year. He won't bring a larger bag as he has in preceding years."

For retailers, that means, "they will be doing less than what they had expected," Edelman said. Noting that retailers normally increase their Christmas sales by 3 percent to 7 percent over the previous season, Edelman predicted that this year sales "will be flat or up about one percent" from last year.

Edelman said the prediction holds true even for the Washington area, which until recently had been considered recession-proof because it was rarely affected by growing unemployment in the rest of the country.

But now, with government layoffs and the closing of several private firms, the recession is beginning to be felt here.

Woodies, regarded as a bellwether here, just reported a smaller than expected level of growth for October and November. The same has been true for Rich's, where "October was a tough month and November has not been very scintillating," Rich said.

At Raleigh Stores Corp., "sales are running just behind plans," said Ike Diamond, vice president for sales promotion. "Our outlook for Christmas: We're hoping to do as well as we did last year although prospects look a little dim . . . Usually, we do better than the year before."

William D. Striegl, district manager for Washington and Baltimore area J.C. Penney Co. stores, expects sales to increase "somewhere in real terms of 6 percent. Last year, our increase in real terms was around 15 percent."

The same experience is being encountered at smaller stores. Appalachiana Inc., an 11-year-old Bethesda store that specializes in American crafts, has normally shown 20-25 percent growth in revenues and profits during the Christmas season. "I think I may meet last year's figure--or maybe 5 percent above," but probably not more, said the store's owner, Joan Farrell.

"There is a whole panic about the economy and people are very job threatened . . . so people just don't go out and buy the essentials now. I've not yet seen my old reliable customers who come with money for serious Christmas buying." As a result, Farrell said, for the first time since she has had the store "I have canceled orders" for new merchandise.

One of the few stores open yesterday reported higher than expected sales, however. Zipper's, a clothing store that was offering discounts on a wide variety of apparel, did more than twice as much business as it expected in its Greenbelt store-- $1,000 in sales compared to the $400 it anticipated on the holiday. On a normal Thursday the store does $1,500 in business.

Although the sluggish sales may mean bad news for retailers, they are certain to bring good news to consumers. Stores will be offering deep discounts and bargains to attract customers.

"From the consumer standpoint, there are some incredible values out there that weren't out there last year," noted David Milbrandt, vice president of merchandising for Garfinckel's. "There were more sales and markdowns in early November than has been the historical pattern . . . If business doesn't materialize, obviously there would be more markdowns."

Many high-priced designer goods are already on sale, as are many winter items, thanks to the warm weather this month which deterred buying.

Furniture, which has been selling slower than most other items, is also being heavily promoted. W & J Sloane Inc., for example, has launched a special discount sale in which all items--even those already marked down--will be reduced by another 10 percent. Another first-time-ever sale, which will result in 20-50 percent discounts, also will be offered this month, according to Frank Mannarino, Sloane's executive vice president for Washington area stores.

Electronics is another area where sharp discounts are expected. As Penney's Striegl explained, "There is an abundant supply and a variety of goods available and it is a highly competitive situation . . . There will be some cutting, especially as it gets close up to Christmas."

Discount stores also will benefit as large retail stores, eager to get rid of their large inventories, begin selling them goods. Lynda Mobley, manager of the Alexandria outlet of the national Tuesday Morning discount chain, which sells close-out merchandise, acknowledged that trend, saying 'We're getting much better quality of merchandise."

In the end, financial analyst Edelman predicts, all the inventories will be sold--but probably at lower prices than retailers first had hoped.

But as Raleigh's Diamond noted, there is one more day of shopping between Thanksgiving and Christmas this year--a nice and apparently badly needed present for the retailers.