The Capital Children's Museum, which has been bursting at its seams since it opened in October 1977, has received a $1.7-million federal grant to purchase a whole city block at 3rd and H Sts. NE for its permanent home, Mayor Barry's office announced yesterday.

An initial HUD grant of close to $700,000 will be made immediately and the remaining $1 million will be made available as matching funds are raised by the museum.

Originally housed in four rooms of the Lovejoy Elementary School, the museum has been too small to fill demands of the District's school children almost from the beginning.

"By February of 1978, we were booked throught the school year with teacher's tours," Helen Parker, assistant to the museum's director, said yesterday. "We had 35,000 children at the museum that year and we had to turn away another 12,000. That's when we started looking for a larger space."

The museum is designed as a handson learning laboratory in which children learn by taking part in activities. "This year," Parker said, "we have a Mexican exhibit in honor of the International Year of the Child. The kids can grind corn to make meal and then bake it into tortillas, tend the goats, make chocolate and do Mexican handicrafts. They can draw water from a well, go to market, or shop in a Mexican store with play money."

"Next year," she said, "we hope to bring back the city room that was so popular at Lovejoy. There was a mockup of a Metro bus that the kids could 'drive' and change the sign for the destination; there was a police motorcycle with its radio, and a traffic signal with a Plexiglas cover for the insides, so that the kids could watch the gears moving as the signals changed. We even had a mailbox that they could crawl into and see what it would be like to be a letter, sitting in the dark."

The museum's philosophy, she said, is based on an old Chinese proverb: "I hear and I forget; I see and I remember; I do and I understand."

The museum has to raise $1 million in matching funds by Sept. 30, 1980, to receive the full grant and plans to solicit funds from corporations, foundations and private citizens. "Right now," said Paker, "we're searching for funding of an exhibit on communications that will run all the way from cave drawings to a working video studio."