New York Daily News columnist Ken Auletta has set off a summer squall in the literary world simply by uttering the word "sleazy" in New York magazine's gossip column.

The comment distressed novelist Larry McMurtry, president of the PEN writers organization. It distressed Robert Caro, Susan Sontag, Allen Ginsberg, Grace Paley, John Irving, Norman Mailer, Arthur Miller, William Styron, Edmund White and 40 other members of PEN's 79-member board.

McMurtry fired off a letter to Auletta berating him for uttering "a casual slur in a cheap magazine." And the 50 PEN board members sent a letter of support to the subject of Auletta's barb: corporate raider and big-time PEN pal Saul Steinberg.

Not only is Steinberg a generous contributor who encourages his wealthy friends to contribute generously, but his wife, Gayfryd, has just become president of a new PEN foundation created especially to generate a steady flow of generous contributions.

The trouble started when Auletta, author of "Greed and Glory on Wall Street" and a brand-new member of the PEN board, declared in New York magazine that he thinks Steinberg is a "pretty sleazy character" because some of Steinberg's political contributions struck Auletta as improper. McMurtry reproached him, saying the slam makes PEN look like "an organization of ill-mannered ingrates." Getting down to business, he continued: "Such remarks are not lost on other patrons or potential patrons either; why should they want to line up and give us money if contumely is all they are going to receive?"

Speaking from a library in Bridgehampton, N.Y., where he was about to give a talk, Auletta said he's sorry he used the "S" word in a gossip column. But he continues to frown on some of Steinberg's dealings. "I've written that many times and I have no qualms at all about that," he said. He is also bothered by "writers being used as trophies for wealthy people" -- a question he intends to raise at future PEN board meetings.

Steinberg was a close associate of fallen junk bond king Michael Milken, who pleaded guilty in April to six felonies and agreed to pay $600 million in penalties. Among the targets of Steinberg's raids were Walt Disney Corp., Penn Central Corp. and Quaker State Corp. He raked in profits by buying stakes, threatening a takeover and then selling his shares at a premium.

Despite the PEN flap, Gayfryd Steinberg remains serene. "I appreciate the support of so many of the members of PEN's executive board with whom I have worked closely over the years," she said in a statement.

Speaking from Texas, McMurtry said Auletta's is "very much a minority view. You can say it's a significant minority." But he said the board has been "very lopsided in favor" of Gayfryd Steinberg's new fund-raising effort even if some of the money that might come in isn't quite squeaky clean.

Not that PEN has no standards, he said. For example, the organization shuns money that has heavy connections to South Africa. "We get many money offers which we reject," he said. And he acknowledged that "what constitutes acceptable patronage" is a valid subject for debate.

"You squeeze any money hard enough and some blood will come out of it," he said. "There's not too many absolutely clean fortunes."

Auletta said he favors "a taste test" for what money is acceptable. Paraphrasing Justice Potter Stewart's famous definition of obscenity, Auletta said: "You know it when you see it." But many board members appear to take McMurtry's view that the Steinberg lucre is clean enough for them.

"Most money in our society is in some way flawed," said historian and social critic Edward Said. Generally, he said, PEN should feel free to accept money "if it could be put to a good end, and if it's given without any strings attached."

Much of the money raised by PEN, which was founded in 1922 and stands for Poets, Essayists, Novelists, goes to promoting freedom of expression around the world. The group was prominent in efforts to defend author Salman Rushdie last year after Iranian calls for his death.

Frances FitzGerald, winner of the Pulitzer Prize for "Fire in the Lake," said: "In their relationship with us, the Steinbergs have been perfectly impeccable. They don't even object when people scream at them for being them. ... The money of the '80s comes from all kinds of places."

The paucity of support that seems to exist for Auletta's position was explained by editor Sara Blackburn: "You don't get to be a member of the PEN board in your twenties. By the time you're a little older, you understand that funding comes from somewhere."

Gay Talese, author of "Thy Neighbor's Wife," declined to sign the letter of support to the Steinbergs. "I said, 'We're making too much of it.' All of us have to be accustomed to bad reviews, and the same is true of business leaders. Steinberg is tough. He can take it. ... It's like an advertiser. If you ever let the advertisers tell you how things should be phrased, you're out of business."

Talese was instrumental in bringing Auletta onto the PEN board, but that doesn't mean they agree on the Steinbergs. "It's rather elitist to expect our money to come only from those who play the harpsichord," he said. A member of the nominating committee, Talese also helped bring two prominent former board members back into the fold.

Kurt Vonnegut said he resigned several years ago "because I think badly of persons who -- not specifically the Steinbergs -- take enormous amounts of money out of the economy without performing any services."

The author of "Slaughterhouse-5" argues that PEN's annual budget -- about a million dollars -- is "too damn big. It began when we had that congress {in 1986}. Suddenly we needed tons of dough -- we gave free transportation to indigent writers and that sort of thing. We built up a bureaucracy for it. And then that was over and the bureaucracy lived on."

E.L. Doctorow said he left the board last year partly because of "the matter of these PEN dinners, which are distasteful to me." The gala events began in 1986 when Norman Mailer was PEN president. The co-host: Gayfryd Steinberg. Doctorow has now rejoined, he said, because he was convinced "my point of view should be represented in board meetings."

In his letter to Auletta, McMurtry said the next board meeting will be in mid-September and "I'm sure this matter will get an airing. Indeed, I look forward to it."

So does Auletta.

"It may be that PEN does such good work that it, practically speaking, outweighs" questions about the source of the money, he said. "But maybe not. I'm going to raise that issue."

Whatever happens, the matter probably won't be laid to rest. Said FitzGerald: "An organization of writers is a contradiction in terms."