USLICO Corp. announced yesterday that an agreement reached during the summer to sell its property-casualty insurance business to a Pennsylvania firm has unraveled and negotiations have been abandoned.

The deal, under which Arlington-based USLICO was to sell its Hawkeye-Security Insurance Co. to Harleysville Group Inc. of Harleysville, Pa., for $135 million, apparently fell victim to weather-related losses that have cut earnings at Hawkeye-Security recently.

USLICO Chairman Charles V. Giuffra declined to elaborate on what derailed the sale, which had been tentatively agreed to in August, but it apparently had to do with the amount Harleysville was willing to pay. He noted that talks had been going on for more than a year, and during that time "changes have occurred both in the profitability of the property-casualty company and in financial markets in general, including the availability of cash and the like."

He pointed out that the property-casualty subsidiary's 1990 profits were off $1.5 million -- to $4.9 million -- and "deals like this are usually done on a multiple of earnings."

Giuffra added that with "the bad year of storms behind us," USLICO expects property-casualty profits to rebound.

Giuffra had said in August that USLICO's goal was to concentrate on its life insurance lines, and yesterday he said that that "is still our long-term plan." However, he said that "given the current situation, we will discontinue any active effort to divest" the property-casualty operations "until things turn around in general."

"We think we have a very valuable asset," Giuffra said, "and we don't want to be disadvantaged by economic circumstances."

The sale had seemed a logical one for both companies. Harleysville is predominantly a property-casualty insurer and operates in 19 eastern states. Hawkeye-Security, headquartered in Des Moines, covers 15 Midwestern states from Indiana to Idaho. The deal would not only have expanded Harleysville's territory, but it would have given the Pennsylvania company a group of states where auto insurance is much less politically contentious than it is in the East.

Both Pennsylvania and New Jersey, where Harleysville writes much of its coverage, are embroiled in political and regulatory battles spawned by sharply rising insurance costs.

A company spokesman yesterday declined to go beyond a brief statement issued jointly by USLICO and Harleysville that said the firms "were unable to resolve a number of issues which arose during the negotiation of" a final agreement.

Harleysville stock was up yesterday by $2.25 to close at $18.50 a share. USLICO's stock fell 62 1/2 cents to $16.37 1/2.