The PEN/Faulkner award is coming to Washington.

Starting in May of next year, the fiction prize--the nation's only major literary award judged, funded and administered by writers--will be given in ceremonies at the Folger Shakespeare Library.

For the past two years, the presentation has taken place in the Rotunda of the University of Virginia at Charlottesville. But "now that it's recognized as the really prestigious award for fiction, it's right that it should be in the nation's capital," PEN/Faulkner organizer and novelist Mary Lee Settle said yesterday.

"The award simply got too large," she said. "There were a number of people who couldn't get there because Charlottesville seemed out of the way," and because of limited seating in the Rotunda, "we had to turn so many people away." So this spring Settle began looking for a Washington location, and the Folger "seemed to be exactly the place people were used to as an experimental literature center."

Folger director O.B. Hardison Jr. was immediately enthusiastic. "The Folger library stands for creativity in literature and language above all else," he said yesterday. Although the library has supported scholarship, drama and poetry readings, "we've never been able to develop a program in prose," Hardison said. The PEN/Faulkner connection will change that: Four readings to raise funds for the award have been tentatively scheduled at the Folger, beginning this fall with novelist Ann Beattie and children's writer Katherine Paterson. In the spring, Settle will read, followed by David Bradley, most recent winner of the PEN/ Faulkner award for "The Chaneysville Incident."

The prize was created when the now-defunct National Book Awards were replaced by the industry-dominated American Book Awards, and located in Charlottesville because "it started there, we needed a birthplace, and the University of Virginia was a very good host," Settle said. Since then the award grew rapidly in both reputation and amount, rising this year to $5,000 for the winner and $1,000 for each of five nominees. It is sponsored by PEN, the international writers' organization; the PEN/South chapter headed by Settle; and individual contributions from dozens of authors. The Folger will lend office space to the award organization, and Folger poetry coordinator Jean Nordhaus will help administer the prose readings. "But we are not in any sense sponsoring the award ourselves," Hardison said.

That responsibility, Settle believes, must remain with writers. For last April's ceremonies, she said, "every meal, every single glass of booze was paid for out of writers' pockets," as well as expenses for lodging. Relocating will cut those costs, she believes, because Washington is "one of the leading centers for working writers in the country, with many active PEN members, and we've had many people offer to entertain the writers, judges and advisers during that weekend."

The move will be announced formally at a reception in the Folger Board Room on June 22. Settle is looking forward to the capital comforts: "This is the first time that I haven't had to do everything but scrub the floors."