Arena Stage, one of Washington's landmark theaters, has decided not to gamble on a new location downtown. It will remain in its home of the past 40 years on the Southwest Washington waterfront.

Arena's executive director, Stephen Richard, said yesterday that the decision to withdraw the theater's bid for a large site on Seventh Street NW was made after studies indicated the $100 million cost of a new building outweighed any potential benefits and after the proponents of staying in Southwest made some convincing arguments.

"On balance, the weight of audience response was: 'Location is not our prime concern. Our prime concern is that you invest in the art,' " Richard said. "At the same time the costs and the uncertainty about costs around the downtown option got to the point where cost-benefit analysis said we would probably get more bang for the buck outside of the downtown area."

Molly Smith, the artistic director whose first full season has been Arena's most successful ever, also said the audience's preference for quality was convincing but emphasized that Arena's theaters needed updating. "Our theaters are wonderful spaces, however there is unquestionably a need for renovation of the theaters and expansion of the building because Arena has outgrown its current facilities. My fervent wish is that with this decision we will focus on bringing Arena in all her glory into the new millennium with a spectacular, bold renovation."

The possibility of moving from the complex at Sixth and Maine SW had deeply divided the theater's decision-makers. Members of the downtown business community became enthusiastic supporters of moving Arena to the bustling entertainment district in the Penn Quarter neighborhood.

Others, including Zelda Fichandler, the co-founder of the theater and Arena's guiding light for many years, were less than enthusiastic about a change of venue.

"I have been fearful all along that the enormous cost of moving downtown would weigh down with debt the artistic thrust of the institution and even endanger it. So I think the leadership made the wisest decision," said Fichandler, a life trustee of Arena who voted to withdraw the proposal late Monday night.

Richard said the board's vote was unanimous.

Fichandler said, "I am glad that the board can now concentrate its energies on updating and enlarging the present Arena Stage complex."

Arena had joined the partnership of Hastings Development Corp. and the Charles E. Smith Cos. in a competitive bid for land owned by the General Services Administration at Seventh and E streets NW. The architectural team of KCF/SHG Inc., Hardy Holzman Pfeiffer Associates and Oehrlein & Associates Architects came up with a design for a three-theater complex with 1,500 seats.

Mark Kaufman, the president of Hastings, said yesterday he was surprised at Arena's decision. "I am disappointed for myself, for downtown. I thought Arena would have been a wonderful addition to the theater district. I think they would have had to stretch to raise enough money to go downtown. I think ultimately they would have been successful, but it wasn't my call," he said. Kaufman said he had not formally withdrawn his team's proposal but had notified GSA yesterday of Arena's change of heart.

Richard said their consultants estimated that it would cost between $80 million to $100 million for the new complex. "One of the things we learned is that you are lucky if you are within 25 percent of what it actually costs. It is not that we said we couldn't raise $80 million," Richard said, but the investment could be stretched further in Southwest.

The current theater campus, which includes three performance spaces, is owned by Arena. The theater, which opened in August 1950 in another location, has won almost 60 Helen Hayes Awards and was the first theater outside New York to be given a Tony Award. Actors in its productions have included James Earl Jones, Dianne Wiest, Kevin Kline, James Woods, Morgan Freeman, Jane Alexander, Stacy Keach, Ned Beatty, Robert Prosky, Raul Julia, Rip Torn, Robert Guillaume, Shirley Knight, Blair Brown, Avery Brooks and Pat Carroll.

Now that they have decided to stay put, Arena officials have a wish list for the current facilities. It includes doubling the square footage, building on-site rehearsal space, constructing a new black-box theater that would be adaptable for many uses but designated for the development of new American works, and improving the acoustics and technology in all the theater spaces. Early plans also include more space for classrooms, administration and meeting areas, as well as underground parking.

"We are really starting over," Richard said. "As Molly said, and I support her, we can really take advantage of the time we have. We are not on anyone else's timetable.

"There is a lot potentially going on in Southwest," he noted. "There is city and federal attention focused on redevelopment, not only to Southwest waterfront but to all the waterfronts. That impulse seemed to have a lot of legs. That is very attractive to us."

"We want to be a catalyst in Southwest," said Steven R. Bralove, president of Arena's board of trustees.

The neighborhood around the highly successful Shakespeare Theatre and the MCI Arena still might attract another theater troupe. The other proposals under consideration at GSA are: one from JPI Co., which included a 250-seat space for Woolly Mammoth Theatre; a Charles E. Smith and Metropolis Co. plan that included two 150-seat black box theaters; and a bid from Forest City Residential that had 14,000 square feet for Washington Stage Guild.

The GSA is expected to decide shortly on the winner.