Rep. Sidney Yates (D-Ill.) yesterday unveiled a 75-page House Appropriations Committee report blasting the National Endowment for the Arts for relying heavily on a "closed circle" of advisers and operating with "poor managment procedures," and charging that the $149-million agency has "abrogated its leadership role."

The Endowment was ready with a 90-page reply.

It attacked the committee investigation as "so flawed both conceptually and technically as to be almost without merit." The committee "misinterprets our legislative mandate, draws sweeping conclusions based on supposed facts that are breathtakingly inaccurate," and does "a most serious disservice," the Endowment response claimed.

Yates, who leads the Appropriations Subcommittee on Interior and Related Agencies which commissioned the report a year ago, made it public at the second day of the Arts Endowment budget hearing yesterday. He also offered his own evaluation of the staff investigation:

"I don't think the report has really achieved the purposes I hoped for," Yates commented. "I wanted to know how the Endowment worked." He said that he had not expected the report's "total lack of commendation of any part of the Endowmen'ts operation," and didn't believe that "over the years, nothing was done that was constructive or beneficial."

Nevertheless, he added after the hearing, the report's recommendations are "good points that the Endowment has accepted. The conclusions are right." Yates believes that the critical report "serves a most constructive purpose in opening up the operations of the NEA."

The report paints a picture of "a closed circle" of friends and associates running the Endowment: "The composition of task forces, committees, consultants, contractors and panels represents a repetitive use of the same individuals." It says investigatiors found "it was not uncommon" for individuals to hold several overlapping positions in Endowment-related activities.

The Endowment responded that 56 percent of this year's panelists have never served previously, and that only 2 percent of all panelists in the last four years have served on more than one panel. Of more than 1,000 individual panelists in the past four years, only two have held overlapping jobs in the manner described by the report, the arts agency claimed.

The committee report, signed by C. R. Anderson, chief of the Surveys and Investigations staff of the House Appropriations Committee, charges that panelists have sometimes tried to influence votes for organizations with which they are affiliated. In one case an actual "kickback" involving "performance for pay" was alleged.

Upon being informed of the allegation, the panel rejected the questioned application-but failed to notify senior Endowment officials of the incident, according to the committee report.

The Endowment replied that an attorney was assigned to investigate the charge and found it "insubstantial," but concedes that Endowment officials should always be notified of such situations.

The role of the National Council on the Arts, the advisory body which employs well-known personages to approve panel recommendations for grants and discusses policy, was a topic of concern for committee investigators, Endowment respondents and by Yates at yesterday's hearing.

The committee report and Yates urged the council to become more involved in grant approval, perhaps by holding more meetings. According to Yates, the president should appoint new council members if the current ones cannot handle an increased workload.

But the Endowment rebuttal recommends that the council concentrate on policy, labeling as "absurd" the implication that council members "should be intimately familiar with 18,000-20,000 applications which result in 4,500 grants."

Committee investigators found the procedures of the Endowment's panels "to be widely divergent, and, in some cases, inconsistent." But Yates indicated he didn't disapprove if this were true, as different arts may require different procedures.

The report claimed that Endowment contracting procedures are "seriously deficient," with contracts awarded "on a noncompetitive basis . . . to perform services that are the responsibility of NEA staff."

The Endowment response agrees "that there is a need for a tighter rein on the Endowment's contracting activilities."

The committee should maintain current Endowment funding levels, according to the report, until a better method is devised to conduct more visits to applicants' operations. It suggests the committee request the General Accounting Office to audit Endowment contracts and evaluate the Endowment's challenge grant program.

The Endowment report notes that "whether or not our budget grows, applications grow" and asks for an increase in staff ceiling and administrative funds. It concedes agreement with many of the committee report's recommendations, but because the committee report "is so flawed . . . we can take little solace in the fact."

At issue, according to Biddle, is a basic difference of interpretation of the Endowment's legislative mandate. The Endowment "is charged . . . to develop and promote a national policy for the arts," according to the committee report. Biddle says the phrase should read "a national policy of support for the arts."

"The role of the Endowment has always been as a catalyst, not as an arbiter of taste, not as a dominant or domineering entity," asserts the Endowment response. CAPTION: Picture, Sidney Yates, by James K.W. Atherton