THE BRITISH Embassy -- ambassador's residence chancery -- sits on Massachusetts Avenue with all the solid grandeur and majesty of a sacred elephant.

The only note of frivolity visible from the street is the statue of Winston Churchill, giving his V-for-victory finger sign, which sometimes has to be explained to younger visitors.

The grandiose complex was designed by Sir Edwin Landseer Lutyens, an important British architect, in 1931. At the time, it was said that Lutyens had in mind a British country house, that typically understated British term for a bucolic palace. In some ways it's reminiscent of that amazing edifice, Blenheim, which also has two great protruding wings, making a forecourt. The embassy is a more modest version of the viceroy's palace designed by Lutyens in New Delhi, about the same time.

Since the '30s, the building has seen an elegant progression of diplomats, often as stately as their house. Within the limitations of the Foreign Office budget, each embassador and consort do the best they can to give this rather unyielding mass a personal touch. Dealing with 40-50 rooms, including nine bedrooms, is not easy. But Nicholas and Lady Henderson, the current tenants, have been more successful than some in imprinting their taste.

The British Embassy will be the stage for the first major Embassy Row party of the Reagan administration during the visit of Prime Minister Margaret Thatcher beginning Feb. 25. Mrs. Thatcher, her husband and her daughter will stay at Blair House, with the other members of the party distributed in various hotels and in the British Embassy. President Ronald Reagan is expected to come to a gala dinner for 100 in the ballroom, Feb. 27.

Lady Henderson hopes eventually to redecorate the ballroom, but there hasn't been time or money so far. The 49-foot-long ballroom is one of the largest on Embassy Row. Its Austrian crystal chandeliers were made in 1872 for an earlier British residence near Dupont Circle.

What she has done is to redo the dining room, the morning room (family sitting room) and the major guest bedrooms. "The guest rooms are usually full," she said. "We have many people coming and going, and why should our government spend money for hotels, when we have the space?"

As with tenants of most government-issue houses, Lady Henderson was limited to a strict budget. So she concentrated her attention on fresh paint, wallpaper and new, inexpensive fabrics, imported from England and made into curtains and slipcovers by Robechar Decorator of Bethesda. Suzanne Gilligan, who is in charge of all the embassy's houses, worked with Lady Henderson.

The other day, Lady Henderson was dressed in the style she has chosen for the embassy. She wore a dress made of Liberty of London fabric by Hannum Designs of Norfolk, Conn., and later changed, for a picture, into a Laura Ashley dress. She is a small woman, with hair drawn back in a Louisa May Alcott style.

"The house was intended to be an English country house," Lady Henderson said. "So I thought to bring some country feeling to it. I want it to look comfortable and unpompous, a place where people like to eat well, talk and have a good time. We entertain very informally. So we are trying to get an informal look to it. Of course, we think of it as a showplace for British goods."

She has chosen a good time. Not since the turn of the century, when William Morris and the other Arts and Crafts designers were working for Liberty of London, have British fabric designers been so popular. Liberty has never closed, and now they're regaining their earlier status, often with revivals of their older Arts and Crafts designs.

Morris's artists/craftsmen, also called the Pre-Raphaelites, looked backward to a simpler day before the Industrial Revolution, when artists worked in brotherhoods and art was inspired by nature.

Today's romantic mood also reminds you of Marie Antoinette and her court playing milkmaid while their world crumbled around them.

The romantic mood of today in the United States is most often seen in country decorating, specifically handcrafts and flower designs.

In our time, the romantic revival budded with Laura Ashley. She has a shop her on M Street in Georgetown, and her fabric covers sofas and chairs curried locally by W&J Sloane.

The Ashley and Liberty designs bloom with flowers -- part of the English preoccupation with the garden. And that fits the Hendersons well. "My husband is a gardener," said Lady Henderson, "so he has enjoyed the garden here."

"We have to wait until Kerry Blockly, the gardener, has gone in to have his coffee to cut the flowers," John Lightfoot, the butler for seven years and three ambassadors, said. "I learn from her flower arrangements. We keep roses sometimes three weeks in the cool room, cutting them as buds. We dry zinnias in silica gel. We often have flowers drying in closets of unoccupied bedrooms."

At the end of the summer, the ballroom was filled with foldable tables covered with flowers for drying.

Before he was appointed ambassador, the Hendersons had retired to their estate in Wiltshire, England. "We have three cottages: mine, his and our daughter's," Lady Henderson explained. They filled their cottages with Greek and Spanish pottery from her years as a correspondent for Time/Life in Greece, and memories brought home from their service at the great three embassies: Bonn, Paris and now Washington.

Lady Henderson wrote a cookbook with entertaining suggestions based on their French tour. It was recently published in Europe, but not yet in this country, though embassy guests have been treated to the recipes. Most of the pictures and accessories throughout the sitting room and guest rooms come from their cottages. "I found most in junk shops many years ago. But Victoriana is too expesiveve now," she said.

Our private tour of the redecoration began in the morning room. The room had been rather formal with a white, beige and black color scheme. Now the walls are a pale pink. The fabric called "English Garden" on the soft, comfortable sofas and chairs is made in England by G., P. and J. Baker, (about $45 a yard). Bailey and Griffin Inc., 1406 East Mermaid Lane, Philadelphia, Pa., are the importers. Informal arrangements of flowers, stacks of books and magazines, and small porcelain boxes are everywhere.

The clock over the desk is the most interesting object in the room. "It's Austrian," said Lady Henderson."It shows Kaiser Franz Joseph and his wife in their box at the opera, with a clock above them that plays a tune. It was given to us when our daughter was born. She would always stop squeling when the music box played."

The room has several handsome plants, including a rosemary bush and rose geraniums. The fireplace adds to the comfort.

At the moment, little has been done to the drawing room. But with the wonderful Turner paintings borrowed from the Tate Gallery, who would look at anything else?

The dining room has always been very grand indeed with its immense Oriental rug, table seating 32, three chandeliers (Higgins and Cattle of Britain) and pink leather chairs with a crown and an imperial ER on them. The flower prints fit right in with Lady Henderson's scheme, all aimed at making the room less formal. The walls have been painted a soft pink. The curtains are a cheerful chintz, the same pattern as the morning room but a maroon background with red, blue and beige flowers, lined with pink. they are far less imposing than silk curtains. "I always think silk tends to look rumpled in excessive heat," said Lady Henderson. "And these we can take down and wash."

The first room Lady Henderson did was the honored guest room for Prime Minister Margaret Thatcher's first visit here. The room was gift-wrapped in three Laura Ashley prints. the twin headboards and covers were quilted in a deep blue fabric, with a lighter-colored fabric pleated for an underskirt. The chaise longue has a similar scheme. The curtains have the same deep curtains with a lining of the lighter color. the valances have a lighter trim cut from the other fabric. The walls are papered with a Laura Ashley design of blue vines on white. The Laura Ashley fabric cost $8-$9 a yard and the wallpaper $13-$14 a roll, from Laura Ashley, 3213 M Street NW, Georgetown.

On the walls, Lady Henderson has hung some of her collection of music hall sheet music, such as "The Grecian Bend." ("I was born in Greece," she noted.) "Hold Me Closely," "Remarkably loose," "Why Don't You Marry Chip?" and "Second That's Aye Best." Over the fireplace is a large and fascinating picture from Queen Victoria's Jubilee parade.

"The baths were the real challenge," said Lady Henderson. They are generous in size with the old fixtures. In the Laura Ashley room curtains are used between the toilet and bidet and the shower area. The laundry box is covered in ruffles as well. The wallpaper is the same pattern as in the bedroom but here in yellow. For the wall, Lady Henderson has framed an 1878 soap ad and an Osbert Lancaster satirical sketch.

A second guest room is done in flowered Liberty chintz with Coles and Son wallpaper. "The walls tend to flake, so we've used paper where we can," Gilligan said. The walls have white trims making panels for the display of the prints. A velvet sofa has flowered pillows matching the curtains and bedspreads. The Liberty chintz costs $28.50 a yard from Liberty of London, 229 East 60th Street, New York.

Down the hall is part of Lady Henderson's wonderful miniature furniture collection. "My husband says the drawing room here looks like our real one, because I've stuffed it with things," she said. The minature Spanish bedroom has a chandelier and even a canopied bed. The boxes used to display them were old drawers.

You come into the residence under a portico, into a service level. Here is the cloak room with the powder rooms. These rooms have been wallpapered with a Sanderson honeysuckle design from its Trian collection. Even the washbasins have chaste shirred skirts in the Victorian manner.

Lady Henderson has not tackled the ambassador's study. It's very grand indeed, suitable for frightening any but the most confident guest with the might and power of the Commonwealth. aIt is paneled in liquidamber, a type of gum. The room has seven doors, not all working. "Sir Edwin Lutyens [the architect] was big on doors," Lady Henderson said. "Like most architects of his period, he would add doors for symmetry. One of his false doors actually has a real small door for the cat." The study is positioned over the porte cochere , across the landing from the main part of the house, so visitors can come and go without disturbing the residents. The formidable study doorway, lady Henderson enjoys pointing out, has capitals without columns.