DANIEL J. TERRA, 70 looked more like he'd been demoted than promoted as he sat newly ensconced in his dreary, paneled State Department office last week -- the terrain that comes with his new job: ambassador-at-large for cultural affairs.

It's a big come-down from his offices at Lawter International Inc., or for what matter at any of his subsidiaries in Great Britain, Canada, West Germany and Holland. It's even further from the comfort of his home in suburban Chicago, where, nearby, he has his own museum: the Terra Museum of American Art in Evanston.

Yet the bare walls at the State Department seem appropriate -- and symbolic -- given the gloom in the cultural sphere these days, following what most artists and arts institutions see as the end of America's cultural golden age, as well as the end of them: the Reagan budget.

"There's so much emotionalism on the arts issue," said Terra, a slight, considerably more grandfatherly looking septuagenarian than the president of the United States. He is genuinely concerned, but a little suprised, at the vehemence of the reaction. Even before his Senate confirmation two weeks ago, he had begun to recieve a trickle of visits and calls from arts administrators who've been coiled tight, ready to spring as soon as the Reagan administration put someone in charge of the arts. "First thing I've had to do is calm people down," said the ambassador, in his gentle, rasping voice. "Then I tell them that things are going to be better, not worse."

Terra wears his wavy white hair parted just to the right of the center, his toothbrush mostache straight across, without flourishes. It seems just right for the lifelong Republican who helped win the election for Ronald Reagan. As national finance chairman to the campaign, Terra raised $21 million in individual contributions and federal matching funds. "We even returned $1 million to the Treasury," he said proudly.

"We also did some trailblazing, and put together one of the best organizations ever assembled," said Terra, who traveled seven days a week for a year, 350,000 miles in all, on his fund-raising mission. "I'm convinced," says his friend -- now boss -- Ronald Reagan, "That Dan is the only man who traveled more than I did during the campaign."

Arts and arts institutions could use such energy, good organization and trailblazing ideas. Terra means to provide them.

He could have chosen from a number of jobs in the new administration, but according to all reports, he waited to be asked. "He would have done anything the president asked him to do," says William P. Clark, deputy secretary of state and Reagan intimate who helped dole out appintments. Given his business ties to several nations abroad, there was speculation that Terra would be given a major ambassadorship."But that would have been a full-time, immediate change." says Clark, "and though he's a selfless man who'd do anything for the president, that would have required a great sacrifice on his part.

"But this wasn't a job created just for him," says Clark. "It was felt early on that in this year of stringency, we'd have to cut back, but we didn't want to hurt the prominence of American art and culture, particularly in its international aspects. There was the position of ambassador-at-large . . . The need was noted and the man known by the president. He put the two together."

Between his appointment in February and his Senate confirmation in late June, Terra stayed quietly in the background, learning the ropes and working with the Task Force on the Arts and Humanities, of which he is the co-chair, along with Charlton Heston and University of Chicago president Hanna Holborn Gray. "I don't think he realizes yet the potential extent of his power," said one arts official -- who, along with thousands of others, is holding her breath, waiting to see what Terra and the task force will decide about their fate.

Terra has clearly not yet defined either the scope or the potential power of his office. "I don't understand why so many people want to work here," he shrugged. "It's such drudgery."

By last week Terra's government issue desk was still sparsely covered, with a scattering of papers, one plastic pencil cup, the Congressional Directory, and an empty "in" basket. Spread across the center of the desk, however, was an array of yellow telephone messages, all laid out in rows, like so many tarot cards. It seemed that Terra himself had been scrutinizing them for some clue to what the future has in store.

His job description is wide-ranging but vague, and reads in part as follows:

"Mr. Terra will report to the secretary of state, and represent the president at major national and international cultural events having significant American participation." In this role he will go to China in September to open the first exhibition of American art ever to be shown there.

"He will make recommendations to the president and secretary of state regarding broad cultural policies and activities of the U.S. government." This function includes his work on the task force, which will be dissolved in September.

"He will provide guidance to the Art-in-Emabssy program to ensure that American art displayed in ambassadorial residences abroad is representative of our national cultural heritage and in concert with the president's goals and international policies of the Department of State. It was this assignemnt that prompted columnist Jack Anderson last week to label Terra a potential censor "an arbiter of taste and patriotism."

"As the president's representative, Mr. Terra will act as adviser and coodinator of existing government cultural agencies and department." In other words, Joan Mondale's old job as chairman of the Federal Council on the Arts. It was an instrument she used masterfully to squeeze arts support out of government agencies. It is also an instrument that could serve Terra well. First, however, the president will have to appoint Terra to the council. Due to a fluke, the State Department is not currently represented on it.

Fully occupied with the task force until now, Terra had not yet had time to fully familiarize himself with other aspects of his job, either foreign or domestic. Not yet sworn in (that will happen Wednesday), he is thinking chiefly about ways to raise private arts money to replace what will be taken away in the federal budget.

In that regard, this master fundraiser has some possible solutions, but isn't talking about them yet. "We need new ideas, new incentive-oriented programs, including tax incentives, to help fund the burgeoning arts. Today 90 percent of arts support comes from the private sector. What we need to do is increase that. We're working on concepts that would make possible substantially increased funding from the private sector. They'll be made public in the not-too-distant future, and I think they're going to work."

On the subject of the endowments for the arts and humanities, Terra says "I think they've done well in taking care of embryo groups, as well as the middles and the majors -- and that's important. Most important, they've been making grants on a matching basis, and that's been the key. The challenge grant has always worked, and it always will."

But will the endowments survive, given the sharp budget cuts? "They were reauthorized for five more years, so they'll be around for at least that long," says Terra. "But I agree in principle with everything President Reagan has said. We have to pay the piper and put our house in order. We have to try experimental concepts, and I think we'll find ways. I also think they'll come out way ahead."

Terra said he had not read recent press reports that corporations and foundations are being flooded with requests for funds that they feel they cannot satisfy. "I think corporate management has come through and will again. With the right incentives, all institutions will profit." His track record notwithstanding, the question remains: Can he pull it off?

Next to the empty bookcases in Terra's office are some cardboard boxes from which he proudly produces -- at the first opportunity -- a volume on American Impressionist painting, thumbing the pages to find favorite works, and then describing them in loving detail. It is the catalogue of the exhibition that opened the Terra Museum in Evanston last year. "I gave Ron and Nancy the only hand-bound copy," he said, fondly remembering an event that obviously bound his two greatest passions together. "I think they still have it, I'm sure they do, but," he said worriedly, "I don't know -- I haven't been up there."

"This is by plan and intent an American museum, and it came about in a strange way," says Terra, launching right in."My alma mater, Penn State, asked me to help them raise money by showing some of my American paintings. I gave a challenge grant and they gave several dinners and raised $2 million.

"When the show was over, they asked about giving some paintings to them upon my death. I told them I wasn't ready, but began to think, for the first time, about what would happen to these paintings, which had become a major part of my estate. Penn State's charter was for a general museum, and we wanted the works in an American Museum. We looked at the Whitney Museum of American Art in New York, but they had many great paintings in the basement, and all we could think of was, well, that's where these paintings we've worked so hard to collect are going to end up.

"We were at a loss, until my wife, Adeline, and I were having lunch with a dealer in New York, and he pointed out that there was no museum of American art within 400 miles of Chicago. I'd never thought of it, but there was the great heart of America, and we didn't have a museum of American Art! We looked and finally found the perfect space -- a former flower shop, with so many beautiful textures and vistas. Our big worry was whether anyone would come, and it gave us butterflies. But attendance has gone beyond our fondest expectations -- 40,000 visitors in the first year. We decided we'd do it only with funds from the family for the first five years, though some 400 members have signed up." Would he take corporate or private support if offered? "Every bit of it," he chuckles.

Though he's stopped giving away paintings, his philanthropy and fundraising skills have been lavished on nearly every cultural and educational institution in the Chicago area -- not to mention hundreds elsewhere -- from the Lyric Opera (of which he is vice president), the Chicago Symphony, the Chicago Art Institute (where he sits on two acquisitions committees) to the Illinois Institute of Technology. Despite his generosity -- not to mention his great success in business and politics -- he has managed to keep a very low profile, even in Chicago. "When he was appointed," admits one native Chicagoan who works for an Illinois congressman, "I had to call around in Chicago to find out who he was." A former Chicago newspaperman, who until recently covered the business beat, said he'd never heard of Terra until he opened his museum. "He's a real right-winger, I hear." Asked about Terra, Joan Mondale's aide Bess Abell replied, "Daniel who?"

Dan Terra could have been a song-and-dance man, which qualifies him in the performing as well as the visual arts. "My mother was a dancer, but of course she gave it up because there were no opportunities for feminine entrepreneurs in those days." He did some performing in high school, but his career ended abruptly during his junior year at Penn State, when a freshman wrested away the lead part in the big musical. The upstart?Gene Kelly.

"I still sing baritone at parties among close friends," says Terra, "and I love to dance. I never miss a single dance at a party." "The ladies love him," says Helene Von Damm, special assistant to President Reagan, "and love to be seated next to him at dinner. He makes them feel like a queen."

He credits his mother with his love of cultural things and his father with his love of Republican politics. His parents were Italian immigrants -- "smart ones; they came early," says Terra. Though it's been said that his father was a penniless immigrant, that's not true, says Terra, though he admits "it makes a better story." In fact, his father was ultimately the manager of a lithography plant. "I never had to work my way through college, let's put it that way."

At 28, with a degree in chemical engineering, Terra - by then an ink chemist -- started Lawter Chemical Company with a $2,500 loan from a friend, John H. Lawson. In 1960, Lawter went public, and by 1980 sales were $80 million, with an after-tax profit of $12 million. Investors did well, too. An initial $700 investment, after 14 stock splits, had become worth $31,000, with an annual dividend of more than $1,200.

Terra -- whose family still owns the largest share of the company -- sets a high standard for the other philanthropists, and gives away "up to the hilt, 50 percent of my taxable income" every year. "That's why he's such a phenomenal fund-raiser," says Von Damm, one of Terra's biggest fans. "If he's convinced it's a good cause, he'll be the first to give money. He doesn't ask anyone to do anything he won't do.

"He's a humble sort of individual, very low key, who'd never throw his weight around," she adds. "I can tell you, he may not be part of the original California group, but both the president and Mrs. Reagan think very highly of him. The president is a laid-back individual as well, so there was a natural sort of understanding and simpatico. "At the beginning, Dan was not well known to any of us either," says Von Damm, "but had a great reputation and was recommended for finance chairman. But he didn't say yes immediately.He had several meetings with the governor and the first lady, and wanted to know where they stood on issues, how they felt about things. Only after he was totally satisfied that he could speak for Ronald Reagan and knew what made him tick, did he accept.

"he's a very thoughtful, thorough individual, and when he makes a commitment, its a commitment."

Terra flies tourist class, Golden Age fare when he can get it. In Washington, a favorite lunch with his new legal aide is the apple-and-brie plate at the National Academy of Sciences refectory, just across the street from State.

Back home, he drives a Chevy station wagon, which he sometimes uses to haul valuable paintings from his office to the museum -- to the dismay of the staff, who might prefer more professional handling. "He'll often turn up at the back door, and knock on my window asking to be let in," says museum director Ronald Melvin, a former investment banker who helped Lawter Chemicals go public.

"He gets a terrific kick out of buying art, and also has great knowledge and taste," says Melvin. "He loves the place, and comes here every chance he gets." Terra's museum has been variously described by visitors as "a little gem" and "a rather ordinary collection of 19th-century art -- the kind you might expect from a conservative Republican." Critics have been generally approving.

Terra's collection recently culled with the help of former Whitney Museum curator and American art scholar John I. Bauer, now numbers around 70 paintings -- all american, dating from 1940 to 1940. The centerpiece is "The Jolly Flatboatmen" by John Caleb Bingham, which set the record price for an American painting when it was sold in 1978 for close to $1 million.

But Terra's favorite painting is by a lesser known artist, Charles Courtney Curran. It is a sunny, romantic scene from 1888 showing two women picking lotus lilies from a rowboat, and he can tell you everything about it, including why he loves it so. It is the blood of a collector -- not an acquisitor -- that runs through his veins.

"The cut-off date for the museum, is 1940," says Terra, without apology, though he has been chided by some arts groups for what they consider an overly conservative preference for representational art. The issue was engaged during his confirmation hearings."People say I don't like abstract art, but I do, says Terra. "It's just that I have to work at it. I do try, and I respect it."

Has he bought any contemporary art? "Sure," he says, scanning his memorary for evidence. "I've bought living painters, like Martha Walters, who lived to be 101 and died in 1978. She was fabulous! Knew everyone -- Prendergast, Winslow Homer, Sloan, Hassam, Hopper, Dove. We have a Dove. That's abstract."

Minister of Culture? "We've never had one and I hope we never will," says Terra. Culture czar? "I have no such ambitions.

"Look," he says. "I'm 70 years old. I have an exciting life back home. I'm involved with my company, and 'd like to be there to see the museum mushroom.

"But I must admit, I see the prospects for this job, and they're very exciting.

"This is an advisory job, not an operating job. But it's a post that I think belongs. And it has great potential. After all, the greatest power in the world is the power of persuasion."