President and Nancy Reagan yesterday awarded the first National Medal of Arts to seven artists and five arts patrons. The president called the medals a celebration of freedom and said that an "atmosphere of liberty" allowed American artists to "think the unthinkable and create the audacious."

"Today I've never been prouder to be an American," diva Leontyne Price declared privately moments after bending her turbaned head to kiss the sterling silver medal. "It's one of the most poignant firsts in my career. To be an American is incredible, but to be an American artist . . ."

Price declined to comment on proposed cuts in federal arts funding or the controversy over the president's scheduled visit to West Germany's Bitburg cemetery. "It would be gauche to bring that up today, don't you think?" she said.

"I'm very pleased to get this medal," writer Ralph Ellison said quietly moments after receiving his medal. "Because of the controversy I was questioned whether I would accept it," he said, referring to the Bitburg visit. "But this has nothing to do with politics. This is an expression of the American people . . . and it will go on, I hope, some time after present political divisions are healed."

Price and Ellison were two of seven artists to receive medals. Also honored were composer Elliott Cook Carter Jr., actor and director Jose Ferrer, choreographer Martha Graham, sculptor Louise Nevelson and painter Georgia O'Keeffe. Medals also were awarded to Dorothy Chandler, founder of the Los Angeles Music Center; Hallmark Cards Inc., for its sponsorship of television's Hallmark Hall of Fame; Lincoln Kirstein, cofounder of the School of American Ballet and the New York City Ballet; art collector and museum benefactor Paul Mellon; and Alice Tully, donor of the funds for the Lincoln Center hall named after her.

Guests included actor Clint Eastwood, who sat at Nancy Reagan's table, ballet director Robert Joffrey, choreographer Edward Villella and actress Kitty Carlisle Hart.

The arts medals were authorized by Congress last year. Yesterday's ceremony was part of the 20th-anniversary celebration of the National Endowment for the Arts. The endowment gives money to artists and arts institutions and is credited with being a catalyst in American arts.

In the past four years, however, only the intervention of congressional arts patrons has kept the administration from slashing the endowment's budget as part of its effort to cut the budget and increase private-sector support for the arts. For the coming year the administration has proposed budget cuts of 11 percent and 10 percent for the arts and humanities endowments, respectively. The administration also plans to eliminate the Institute of Museum Services, a federal agency that awards funds to museums for operating expenses.

Among the honorees, only Nevelson, who appeared regal in flowing robes and silver jewelry, ventured a plea to preserve funding. "We can't have cuts," she said before the ceremony. "Not when the dollar is worth a quarter."

In his speech Reagan paid tribute to artistic courage.

"We celebrate today the courage, talent and commitment of the American artists here assembled," he said to the 103 guests seated in the state dining room. "Ralph Waldo Emerson said to be great is to be misunderstood. It's my hope that this medal today will go some way to tell the great artists here in this room that I think we finally understand you."

He also reminded the audience of the fate of artists in totalitarian states.

"In societies that are not free, art dies. In totalitarian societies of the world all art is officially approved. It is the expression not of the soul but of the state. This state-sanctioned art is usually, as a rule, 99 percent utterly banal and utterly common.

"This is not to suggest that great artists . . . cannot be found in totalitarian states. They're there. Visit a prison and you'll find a number of them. Their garrets are jail cells, their crime is that they refuse to put their minds in chains or their souls in solitary."

Chandler and O'Keeffe were not present at the ceremony.

Chandler's daughter, Helen Chandler Frost, received the award for her mother.

National Gallery of Art director J. Carter Brown received the award for O'Keeffe, whom he had recently visited at her house in New Mexico. Brown compared the award's prestige to that of the French Medal of Freedom and the Order of Arts and Letters.

"It is very important for the artist to be able to gain support and recognition at this level," Brown said. "This is a wonderful thing."

Later in the evening, Sen. Edward Kennedy (D-Mass.) was host at a reception for the medalists in the U.S. Botanic Garden attended by such arts supporters as Joan Mondale, actor Theodore Bikel, Ethel Kennedy, artist Jamie Wyeth and National Endowment for the Arts Chairman Frank Hodsoll.

"At last we are a country where the arts are recognized as equal with scientific research and other high achievements," Kennedy said. He noted that the Congress had played a role in the medal's creation and wanted to "ensure that the medal is recognized as from all the people."