After years of telling Third World countries to do more with less, the World Bank is giving hundreds of its employes a taste of its own medicine in a round of layoffs that will return many of them to foreign countries they left a decade or more ago.

With 6,500 employes, an administrative budget nearing $700 million a year and salaries as high as $92,000 -- tax-free -- the World Bank has long been singled out in Congress and elsewhere as one of the fattest bureaucracies in the city.

But lately, president Barber Conable has sought to take an ax to that reputation, and the impact is being felt throughout the bank's offices in downtown Washington.

As part of a reorganization announced in May, the bank is undergoing the first major employe cutback in its 41-year history. While bank executives say the staff cuts and reshuffling of organizational charts will make the bank more efficient and responsive to its Third World customers, the process has sowed confusion and ill will among the bank's international work force.

"In theory, the reorganization seemed to be very reasonable and logical," said Virginia Hitchcock, an eight-year veteran of the bank. "In practice, it has been chaos."

A popular analogy of insiders to describe the procedures being used to winnow 390 people from the bank's payroll is a game of musical chairs: When the music stops this fall, hundreds of chairs at the bank will be gone.

It's a nerve-racking game that has led hundreds of the bank's economists, engineers and other highly skilled professionals to devote their energies in recent weeks to securing positions. It has also confronted some foreign employes with the prospect of having to leave what has been their home for as long as 20 years.

In the meantime, bank staff and management alike concede that the bank's main task of funding development projects in the world's poorest countries has been left in disarray. As one bank executive who is staying said: "People have been afraid to travel because they didn't know whether they would have a desk when they came back."

The reorganization under way at the bank is not dissimilar to the restructuring that numerous American companies and institutions have undergone in recent years to become more efficient and competitive.

But the World Bank has long enjoyed a reputation as an international outpost for many of the best and the brightest of the world's development specialists. Three-quarters of the bank's employes come from foreign countries. They are in Washington on special visas, many earning handsome salaries and expecting to remain at the bank until they retire. For much of the staff, whether they are going or remaining, the reorganization has been traumatic.

"I feel extremely, extremely bitter about the way this was handled," said Alberto Favilla, an Argentine who has been with the bank for 24 years, for the past five as chief of the Egypt division. Favilla was passed over in the selection of new managers and is planning to leave, rather than accept a demotion.

"Friends have appointed friends. The quality of the individuals was not taken into account" in the staff selection, Favilla said. "This man is not cutting the fat. He is cutting the muscle."

Hundreds of other employes like Edith Nemitz, a 52-year-old German budget officer, have faced seemingly interminable waiting and confusion as a result of the reorganization.

"I had only excellent performance reports, but I could not find a position," she said. For Nemitz, the prospect of accepting a generous separation package from the bank was repulsive: "After working here for 25 years, I cannot go home and sit around. I'm not the type to take money for doing nothing. That's degrading."

Nemitz won't have to go home after all: Less than two weeks ago she was notified that a position would be available for her in the division handling European and Middle East affairs.

While Nemitz will be able to stay, other foreign nationals may be forced to leave the United States after their visas expire.

Hovsep Melkonian is a 43-year-old Lebanese native who has worked in the personnel department of the bank for six years. With broad international business experience, Melkonian says he wasn't planning to stay at the bank forever, but the prospect of being forced to leave the bank "came so suddenly that I have yet to develop any alternative scenarios. I am trying to develop other contacts in London, Paris and Canada. I don't know how successful I will be," Melkonian said. "I am working against a very fast time clock."

Even for those that remain, the reorganization has been so painful that the association representing most of the staff filed an unusual administrative complaint this month with the bank's independent judicial body. The complaint charges that the selection process has been arbitrary and subjective, and that employes haven't been granted due process.

Although it is too late to derail the reorganization entirely, staff association officials hope the action will allow some breathing room for employes fighting to remain with the bank. "We're not disputing the right of the bank to downsize," said Robert Sloan, an attorney representing the staff association. "The issue is the manner in which it is done."

In its formal response to the action, the bank's management denied the association's charges and raised procedural objections that could delay disposition of the case for months.

Bank officials contend they have bent over backward to make the reorganziation as painless and as fair as possible. They say when the restructuring is complete, the bank will be less bureaucratic. Under the old system, for instance, as many as seven departments in the bank could travel to a country to discuss the same project.

Yet bank executives admit staff morale has nosedived in recent months. "I don't think it could have been avoided given the extent of the restructuring that was needed," said William Cosgrove, vice president for personnel and overseer of the reorganization. "One way or the other people will have been upset."

But Cosgrove, who lost his own secretary to the reorganization, added: "In the long term, we believe this will make our operations more efficient." He predicted morale will soon come back because "the great majority of people here are dedicated to development work."

The idea of reorganization is one that many World Bank staffers say they support, given the bank's intention to become more active in helping solve the Third World debt problem. What perhaps wasn't anticipated was the speed and magnitude of the reorganization.

Essentially the entire staff below Conable was released from their jobs in May. Four new senior vice presidents were selected, and these top-level executives selected their own subordinates under a new administrative structure, and so on down the line, in a process that continued to the bottom of the bank bureaucracy.

Christopher Redfern, a British economist who serves as president of the staff association, said that contrary to assurances given by the bank that this process would be fair and "transparent," the staff believes many of the appointments have been made on the basis of favoritism.

An internal memo to Conable from Benjamin King, a highly respected, retired bank executive brought back temporarily in recent months, complains that a carefully crafted personnel system was "jettisoned in favor of what has been characterized, crudely but not innaccurately, as the 'massage parlor' system of selection."

Cosgrove rejected the charges of capriciousness, saying he and other personnel officers exhaustively reviewed all the decisions. "I wouldn't argue that some of us may not have made mistakes with respect to individuals," he said, "but I do take the position that the process was as fair as possible given the magnitude of what we were trying to do."

Round One of the selection process was completed this month, leaving about 600 to 700 employes without jobs, Cosgrove said. In the second round of the reorganization starting in August, some of these people will be given jobs in sections outside their old departments, but there will be no jobs for many.

For the unlucky ones, the bank is attempting to ease the blow with severance packages that will approach $200,000 for some of the most senior officials. The bank has promised employes help in retraining and locating jobs on the outside, and will even offer some funds for starting their own businesses. Cosgrove also said the bank will consider special exceptions for citizens of such countries as Iran or Lebanon, who would face unusual hardship were they forced to go home.

"We're not promising to keep them at their current salary, but if they can't go {home}, we'll keep them in some job," he said.

Notwithstanding the bank's efforts to make the process as smooth as possible, the reorganization has sparked a rash of complaints. Some of the bank's most highly regarded senior officials, like Treasurer Eugene Rotberg and David Knox, regional vice president for Latin America and the Caribbean, are leaving on their own accord. Meanwhile, those that face being forced out express a range of emotions from bitterness and disappointment to relief over having an excuse to try something new.

Dan Bonosky, a 44-year-old senior computer specialist who was passed by on Round One, said he feels the bank has broken an implicit covenant wih him and other nonselected employes. "I loved the bank. The bank was a home for me for 16 years. I thought I was going to be here until I retired," he said. "It was a marriage for better or worse. That marriage has become a divorce."

By contrast, Roberta Preston, a New Zealander who has worked in the bank's personnel department since 1971 and has since married an American, had mixed feelings about the discovery a month ago that she would be staying on board. "I was fearful that I was going to be selected," Preston conceded.

With the separation package offered by the bank, she said, "I could have afforded to leave the bank. I really would like a career in creative writing, and that would give me a cushion to start that off. Now I'll probably stick around for a year or two."