The attempt by City Council member Willie J. Hardy to slash unemployment compensation benefits for inquired workers is in a shambles.

Some observers say the derailed legislative effort will not reappear again this year or perhaps not until after the 1980 elections.

After months of confident expectations that they would gain sweeping concessions from the council and thereby halt the skyrocketing costs of workers' insurance, Washington business groups now say they will be fortunate to win even minor changes in the law.

The euphoric business mood was deflated almost overnight after a Washington Post story June 13 reported that what Hardy touted as her own work -- a 78-page bill and a 12-page proposed committee "report" -- had I actually been taken, much of it verbatim, from lobbying documents prepared by the Metropolitan Washington Board of Trade.

"I don't think the council is going to touch this piece of legislation this year," a senior City Council staff member said. "The board of trade doesn't think it will come up," the staffer said.

Indeed, a senior board of trade official has said that the bill is "too hot." He said news reports about how the bill was drafted "would frighten some of the people who were leaning toward the bill away out of fear of being characterized as board of trade people."

Said one insurance industry lobbyist who spent months helping to draft the bill: "The air is full of hair, eyes and teeth right now. So that's got to settle."

Council member David A. Clarke [D-Ward 1,], who sits on Hardy's housing and economic development committee said, "My guess is it won't cme up again in this session of council," which ends after the 1980 elections.

At the same time, a recall and censure movement against Hardy that was launched at a Central Labor Council press conference two weeks ago appeared aimed more at getting rid of the bill than the council member.

Moments after he forcefully urged the residents of Ward 7 to recall Hardy from office, labor council chief Robert E. Petersen stepped from the glare of press conference lights and confided, "We're not trying to get her kicked out of office. We just want to straighten her out. We hope the people of Ward 7 will burn up the phone lines."

The political battle touched off by the news reports pitted labor groups against business groups that had renewed a year-long effort to change the law and reduce benefits for injured workers.

Workers' compensation is a private insurance system required by law in most states. In the District of Columbia, the system paid about $50 million in benefits to nearly 9,000 Washington area workers who qualified in 1978.

But the cost of workers' compensation insurance to District employers has ballooned by 500 percent since 1972 -- from about $20 million to $100 million. The reason: Congress liberalized the benefits in 1972 and adjusted the system for inflation.

Employers say another reason for the increase is that fraudulent claims have increased because the maximum weekly payment to an injured worker has jumped from $70 a week to $396.78 weekly.

Except for Alaska, Washington has the highest workers' compensation benefits in the nation.

Labor officials who defend the system say that fraud is negligible. They say that no injured worker is paid more than two-thirds of his average weekly wage. Moreover, they say, city benefit have risen fast to compensate for their inordinately low levels prior to 1973, when a totally disabled worker with a family of four was forced to live below the poverty level on workers' compensation benefits.

Labor officials also never tire of saying that the payment of wage-loss and medical benefits to injured workers is part of the social bargain struck 50 years ago when workers gave up the right to sue their employers for negligence in on-the-job accidents.

For the moment, Hardy's bill is dead in committee, where she said that she has "some more educating to do." Under committee rules, however she could resurrect it at any time.

"Most bills that die in committee don't die by action. They die by inaction," Clarke said. "And I haven't seen this matter on any agenda of the housing committee lately."

In the meantime, opposition to the bill grew when the D.C. Democratic State Committee voted 14 to 9 for a resolution insisting that no workers' compensation benefits be reduced in the District.

Moreover, a group of black physicians, criticized the bill as regressive and unfair.

E. C. Noel III, president of the Medico-Chirugical Society of D.C., said the group was most concerned about a provision of the bill that would take away an injured worker's freedom to choose his treating physician. Instead, workers would be required to see doctors retained by their employer.

Also, Noel said, the group is not convinced that employers would ensure "adequate repesentation of minority physicians" if the bill passed.

Council chairman Arrington L. Dixon reacted swiftly to the demands for Hardy's censure. "There's no reason to censure anyone," he said. "All of my committee chairpersons are doing a fine job and represent the views they think they represent -- that's their right as elected officials."

By the end of the week, the insurance industry and the board of trade were regrouping in hopes of salvaging what legislative changes they could get this year from a council that is largely sympathetic to the argument that workers' compensation costs are out of control for employers.

Said one insurance industry lobbyist: "My people tell me , 'Just get us one thing.' They're willing to eat [forgo] all of the other provisions [in the bill]."

The "one thing" is the removal of what is known as the "Rasmussen case" provision of the current law. The provision takes its name from a Supreme Court case that rocked in the insurance industry in 1978.

A legislative oversight in 1972 neglected to set a ceiling on how much windows of workers killed on the job could receive in workers' compensation benefits.

Under the law, windows are entitled to 50 percent of their deceased husband's weekly wages. However, languages was omitted that would have put a ceiling on those benefits at $396.78 a week.

As a result, the young widow of an executive who earned $100,000 a year could receive $50,000 a year -- adjusted annually for inflation -- for the rest of her life. The total payout by the insurance company might be tens of millions of dollars for all recipients.

The insurance companies argued that Congress intended the ceiling to apply windows just as it applied in all other benefits cases, but the court disagreed. CAPTION: Picture, WILLIE J. HARDY . . . subject of recall, censure drive