U.S. News & World Report, which underwent a substantial redesign 18 months ago and spent big bucks to lure name journalists and consultants, says that steady circulation gains last year show its costly strategy is working.

But competitors vehemently challenge the importance of those circulation gains, arguing that there are a variety of tricks that can be used in the circulation game.

In 1986, circulation of the Washington-based U.S. News increased 9.7 percent, compared to 2.5 percent for Time and 1.4 percent for Newsweek, owned by The Washington Post Co. According to Jake J. Winebaum, vice president of circulation for the perennial No. 3 of newsweeklies, that means U.S. News is beginning to take off.

Winebaum said the magazine, which was purchased by real estate magnate Mortimer B. Zuckerman in 1984 for $163 million, has carved out a niche for itself by focusing on "news you can use" -- personal finance, taxes, careers, education, exercise and diets.

Corporate executives at the magazine call Winebaum, 27, and executive vice president William Harris, 31, the U.S. News whiz kids and credit them with the circulation growth.

But many in the industry are skeptical, saying that they doubt the circulation increase means anything significant. They point out that U.S. News still significantly trails Newsweek and Time.

"When you're starting from way down, the only place to go is up," said Brian Brown, spokesman for Time.

Time had an average paid circulation of 4.7 million and Newsweek 3.1 million for the last six months of 1986, according to statements filed with the Audit Bureau of Circulation, an industry group that reviews sales data.

In comparison, U.S. News had an average paid circulation of 2.3 million during the last six months of 1986, and 2.4 million during the first three months of this year, according to ABC statements.

One Time executive disputed the idea that U.S. News's circulation gains were due to the popularity of its redesign, arguing instead that they resulted from dramatic cuts in its basic subscription rates.

In September 1985, U.S. News cut its basic yearly rate from $41 (79 cents per copy) to $29 (56 cents), and then raised it last September to $34.50 (66 cents). In comparison, Time's basic rate is $58.24 ($1.12) a year and Newsweek's is $41 (79 cents).

But Winebaum said that cutting the basic rate did not necessarily make U.S. News cheaper, because it was coupled with a decision to curb discounts and premiums, still used heavily by Time and Newsweek.

U.S. News discounted only 15 percent of the subscriptions it sold during the last six months of 1986, according to the ABC statement.

In contrast, Time and Newsweek discounted their basic rates 79 percent of the time, according to ABC figures. Time's discounted rates ranged from 95 to 60 cents, while Newsweek's rate dipped as low as 46 cents.

Similarly, during that same period U.S. News only used premiums -- such as free clocks and calculators -- on 23 percent of its sales, compared to 41 percent for Newsweek and 55 percent for Time, according to ABC statements.

At the same time as its 1985 rate reduction, U.S. News extended the subscriptions of readers who had already paid the higher rates. That meant that an average of 50,351 copies per issue were sent out essentially for free during the first half of 1986.

Harris said the extension was offered so that subscribers who had paid $41 would not feel cheated. But Harold Shain, circulation director of Newsweek, said the extensions provided an artificial boost to U.S. News circulation figures.

In addition, about 16 percent of the U.S. News subscription sales during the second half of 1986 were by independent sales agents or door-to-door magazine salespeople. At Newsweek and Time, independent-agent sales average 3 to 4 percent, according to Shain.

He said that renewals by people who buy from independent agents tends to be lower, and magazines get little money from those independent agent sales because commissions are so high. In fact, Winebaum acknowledged that for a short time in late 1985 U.S. News gave its sales agents 100 percent of the revenue from sales. He said the company is substantially cutting back on the use of independent sales agents.

Magazine consultants say that the cut in the basic rate, the high commissions to sales agents, and the costs of the circulation push -- along with the costly redesign, the hiring of high-priced writers and consultants, and the soft advertising market that has hit all three newsweeklies all add up to a money losing venture.

They estimate that U.S. News has gone from a marginally profitable enterprise to one that is losing several million dollars.

But Winebaum and Harris dispute that conclusion. Harris said unequivocally that the magazine is making a profit. He declined to disclose the profit or revenue of the magazine. He also said renewal rates are high, but he said he could not disclose those rates, citing ABC restrictions.

Winebaum also argued that the reduction in the basic rate did not reduce magazine revenue, because it was coupled with the decision to drastically cut costly discounts and premiums. He added that the circulation budget was reduced last year, since higher response rates meant that fewer mailings and television ads were needed.

The profit picture was also helped by a cut in production expenses last year, particularly lower paper costs and the elimination of one of four production plants, according to Harris.

Newsweek's Shain said he is skeptical about claims that U.S. News is blooming with fiscal health, noting that the company has not raised its advertising rate base.

The rate base is used to establish advertising rates; thus, a higher base means more money for each ad.

U.S. News has a rate base of 2.05 million, meaning an average bonus for advertisers last year of 237,016 copies each issue.

That's an expensive policy, say magazine consultants, who note that it costs about 65 to 80 cents a copy to produce and ship a newsweekly.

Shain suggested that U.S. News has not raised the base because of uncertainty over renewals by new readers. But Harris said the company simply felt it unwise to raise rates in the current tough ad climate.

U.S. News lost about $1.1 million in advertising revenue last year. The number of advertising pages dropped from 1,779 pages in 1985 to 1,666 pages last year, according to Adweek. Both Time and Newsweek also lost advertising revenue and pages in 1986.

In the first quarter of 1987, Newsweek ad pages increased slightly, but those of U.S. News and Time dropped, according to the Publishers Information Bureau.