Joseph Papp, the highly vocal producer of the New York Shakespeare Festival, yesterday called for major changes in the way federal money is awarded to arts groups throughout the country.

"The dispensation of federal funds and the selection process should be entirely within the states, Papp said by phone after a press conference on the same subject in New York.

"That would give the arts organizations direct access to the (funding agency) administrators. Let the people in Colorado decide what is most important. New York doesn't need a National Endowment for the Arts. In fact, at this time of funding crisis, we can be twice as effective in the city and state in terms of putting direct pressure on governmental bodies."

"The way I understand it, he would dismantle the Endowment and pass the funds to the various states," said National Endowment for the Arts chairman Livinston Biddle. "To disband the NEA would discount the value of the panel-review structure (in which experts make funding recommendation in their fields). That's a major reason why federal support is recognized as valid and important."

"I think it's a really bizarre suggestion," said Biddle. I think Joe Papp is an immensely creative producer. And I would point out that he is funded by the Endowment to the tune of $348,000."

President Reagan will recommend in the budget he sends to Congress a 50 percent cut in funds to the NEA. "I'm organizing people to fight for the restoration of funds to the NEA," said Papp. "The cuts are too deep, too drastic. But the structure of federal funding should be changed. To administer the arts from Washington is not a good idea."

Papp did suggest a federal "crisis fund" that would award "disaster relief" nationally to seriously failing arts organizations.