The profitable importation and modification of European luxury cars that do not meet U.S. safety and emission standards would be cut off under legislation recently proposed in both houses of Congress -- but not if some lawmakers can help it.

Under current federal law, automobiles not meant for the U.S. market may be imported on the condition that they are shown to be in conformance with standards soon after their arrival. Originally intended to allow returning diplomats and servicemen to bring in nonconforming vehicles, the option has given rise to a so-called gray market under which more than 40,000 Mercedes Benz, BMW and other luxury cars were imported in 1984.

Supporters of the move to cut off the gray market frame their arguments in terms of concern that a large number of cars have not been brought up to safety standards, and that federal agencies do not have the resources to ensure total compliance with the rules. The proposal, however, has run into opposition from lawmakers who feel the issue is not primarily one of safety, but rather part of an effort by luxury car dealers to protect their monopoly in the U.S. market.

An amendment to the National Traffic and Motor Vehicle Safety Act of 1966 -- proposed by Sens. Wendell H. Ford (D-Ky.) and Daniel K. Inouye (D-Hawaii) -- would eliminate the gray market by preventing the importation of cars that do not meet U.S. safety standards except in certain cases. The amendment was approved by the Senate Commerce Committee in April, and Senate aides said they expect it to come to the floor soon after the July 4th break. Similar legislation has been proposed in the House by Rep. Matthew J. Rinaldo (R-N.J.).

Gray-market cars usually are substantially cheaper -- from 10 percent to 40 percent -- than comparable U.S. versions, which translates into thousands of dollars in savings even after shipping and modification expenses for the foreign version car.

"Americans are clamoring for Mercedes Benz, and they are tired of paying stupid prices," said Chris Brady, an aide to Rep. Thomas J. Bliley (R-Va.). Bliley is leading House opposition to ending gray-market imports. He and other opponents of the legislation argue that while there are some bad operators who perform faulty or inadequate conversions, the great majority of cars are brought up to U.S. standards and are perfectly safe.

Sen. Warren B. Rudman (R-N.H.) has placed a hold on the Ford-Inouye provision and is reportedly working on an amendment that would keep the gray market open but tighten certification of converters. Such efforts are expected to be supported by Sen. John C. Danforth (R-Mo.), the chairman of the Committee on Commerce, Science and Transportation, who voted against the legislation in committee.

Congressional aides said it is difficult to predict what kind of legislation, if any, will eventually pass either house, because members have not yet been able to determine the extent of the safety risk posed by gray market automobiles.

Mercedes-Benz dealers and officials with the American International Automobile Dealers Association said that the vast majority of direct imports have not been and cannot be retrofitted to U.S. standards. Catalytic converters often are inserted too close to fuel lines, risking fire, and the bars placed to strengthen the doors against side crashes often are inadequate, they said, citing what they said are two of the major problems encountered in gray market cars.

While the dealers said the gray market is not making a dent in their businesses because they are selling all the cars they get from Europe, they said they are worried that the growing business threatens the luxury car's reputation.

"If people get killed in Mercedes, the headline is not going to read 'Gray Market Kills People,' but 'People Die in Mercedes,' " said George Cravaritis, sales manager at Herb Gordon's Autoworld, an authorized dealer in Silver Spring. "The product is losing credibility. That's the danger."

As converters and modifiers tell it, however, the dealers' cries are just a smokescreen to protect their monopoly on luxury cars. "I just find it very hard to conceive of a system where a foreign country can use our Congress to form a cartel," said Peter Lissiuk, president of Emerald City Design in Gaithersburg, a converter.

While Lissiuk and other modifiers said there are some bad operators in the business who need to be weeded out, they said most do even better work than mass manufacturers because they are able to approach every automobile individually.

Although several industry and government studies have been carried out on the safety of gray market cars, Diane K. Steed, the administrator for the National Highway Traffic Safety Administration, said that it is unclear whether a sizable majority of direct imports have been retrofitted to U.S. standards. She said, however, that she has heard of nobody killed or injured because of inadequately converted gray market cars.

"Our concern is one of safety," she said. "It's tough to say whether this is a safety issue or not." One problem she said probably could be worked out without cutting off the gray market was the difficulty of recalling the cars, which currently have no standard vehicle identification for recall.

Steed said no final decision has been made on proposed NHTSA rules that could wipe out the gray market without congressional action. Under the Motor Vehicle Theft Law Enforcement Act enacted last fall, the importation of nonconforming cars under bond was prohibited, and manufacturers were ordered to affix vehicle identification numbers on parts.