City officials canceled a $6.9 million loan to International Harvester Co. at the last minute yesterday because they feared the financially ailing company would not be able to repay the debt.

The money was to have been used to move equipment from a Harvester plant in Louisville, Ky., to beef up a Rock Island facility, adding 500 jobs in Rock Island.

Meanwhile, Harvester said a newly won set of union contract concessions would allow the company to keep open a castings foundry in Waukesha, Wis., that it had previously announced plans to sell or close. The move will save 230 jobs at the facility.

Harvester officials said the collapse of the Rock Island deal was the result of a misunderstanding, and that they were optimistic the problem could be cleared up.

Rock Island officials balked at the loan, part of a $7 million package, because of a disagreement over collateral. City officials said they were not sure that they would have sole possession of a $22 million automated warehouse, put up by IH as collateral, if the company defaulted on the loan. It was also unclear if the warehouse's equipment and computer control system were part of the deal. City officials claim an IH default could raise local taxes 20 percent.

"I'm heartsick to have to sit here and do this," City Manager J. Neil Nielson said in announcing the city had backed out of the deal. "I'm not sure what the future is between the city of Rock Island and International Harvester."

Jack D. Rutherford, president of Harvester's international and components group, said the contract modifications won in Waukesha "make Harvester's continued presence in Waukesha not only practical, but also highly desirable." The United Steel Workers union, which represents workers at the foundry, agreed over the weekend to a three-year package of wage and benefit adjustments that will save the company $1 million annually.