An art exhibit designed to promote mutual understanding during National Hispanic Heritage Week has instead provoked a bitter controversy between Hispanics and the General Services Administration.

The exhibit opened Monday in the GSA building at 18th and F Streets NW -- but without eight huge panels of photographs that the GSA withdrew only hours before a 5:30 p.m. reception for the show's opening.

"Some of the material was politically sensitive," said William Richardson, acting director of the Office of Civil Rights at GSA. But several of the exhibit's artists defended their graphic photographs of poverty and accompanying editorial captions as "the reality of Latin America."

Angered by the GSA decision, they are now threatening to remove the entire show pending further discussion this week.

"There is a law that says you cannot espouse political views in a government building," said Peter Masters, head of graphics for GSA and the man who has final approval over the constant stream of exhibits that come to the GSA's lobby.

"We're not trying to make a political forum," said Hugo Medrano, co-owner of GALA, Inc., the Hispanic visual and performing arts group under contract with GSA to provide and arrange the exhibit. "This is Latin America today," he said. "We're trying to present the reality."

The exhibit -- scheduled to remain at GSA for a month -- is called Latin America: An Emerging Reality," and contains woodcuts, photographs, ceramics and tapestries.

Among the items removed by the GSA was a photograph of a corporate boardroom juxtaposed with a photo of a poor family huddled together. Another pairing placed a South American mansion next to a hovel. Part of the text on that panel of photos reads: "Tradi- tionally a small elite has benefited from the wealth of the lands, while the majority, who work the land, live in poverty.

"Recently the military dictatorships of Argentina, Chile and Uruguay have further aggravated this situation . . ."

"Many of these pictures I would put up in any exhibit," Masters said, "but it's the context of the captions. Maybe it's true -- maybe it's all true. It's not for me to say."

GSA officials worried about the diplomatic repercussions from both Latin American governments and multinational companies.

"We're talking about a country we have diplomatic relations with," said Masters about a banned text explaining that some Chilean arpilleras (tapestries) were an expression of the poor "against their poverty and oppression." "If you were a representative of that embassy and you saw that, wouldn't you hightail it over to the State Department and complain?" (The colorful tapestries, some depicting people behind barbed wire, were allowed to remain.)

Masters added later than "even if they had written captions that said, 'The ruling juntas are beautiful and wonderful,' we would still have said, 'No good -- can't put that up in a government building.'"

"We object to their procedures," said Rebecca Medrano of GALA. "They did this at the last minute, after we had gotten approval."

But what exactly was or wasn't approved is a matter of much debate.

GALA was approached about putting together an exhibition on Aug. 7 according to the Medranos, who then wrote a proposal, which was accepted. The payment was to be $2,088. "We were told no pornography and nothing that shows torture, tanks or dead people," Hugh Medrano said.

Masters said that he asked some time in August when he would be able to see GALA's work. "They explained to us that it wouldn't be assembled until the last minute," he said, "but they showed me some photographs. And I said, 'Look, some of these won't work.'"

The Medranos said they had the show ready last Friday for inspection by the 12-member non-GSA related board, which approves art exhibits. A board member appeared on Friday. The Medranos claim they had his approval. Masters said the man called him that night and warned him that there might be problems with some of the photos and text.

On Monday the Medranos arrived to finish setting up the show. Later in the afternoon, Masters, Richardson and Minerva Lopez -- head of GSA's National Hispanic Employment Program Management -- all looked at the panels and decided that some should come down. The said they tried unsuccessfully to get in touch with GALA.

When the Medranos showed up half an hour before the reception, Mon- day evening, they found the panels down. Some of the artists were angered. Naul Ojeda tried to rip down his woodcuts from the wall in protest, according to Rebecca Medrano. He was persuaded not to.

Then a group of artists put up a sign claiming that the exhibit had been censored, but GSA officials made them take it down. The GSA officials met with GALA yesterday afternoon. At that meeting, Masters agreed to re-examine the banned works with a member of the GSA's advisory art board. Some may be reinstated. But if the artists object, Richardson said, the entire show may be taken down.