In an action that could determine the character of future development in Washington's most historic neighborhoods, the District of Columbia government yesterday vetoed construction of a 10-story building near Dupont Circle because it would have been incompatible with the surrounding area.

The decision by Carol Thompson, an agent of the city's new Historic Preservation Office, blocked issuance of a building permit sought by the International Association of Machinists for an office building and shopping arcade at Connecticut Avenue and N Street, next to IAM's present headquarters.

Thompson said she found the proposed building, designed by architect Viastimil Koubek, incompatible because of its height, its flat granite facade, and its "unarticulated and abstract" window design.

The IAM project was the first new building to be reviewed by a mayoral agent under the city's new historic preservation law, which has regulated construction in the city's 14 historic districts for just over a year. Thompson's interpretation of the law could set a precedent for the kind of future development that will be permitted in all of the districts.

Although the Dupont Circle area already includes a number of tall office buildings -- some taller than the IAM building would have been -- Thompson said that was not the primary consideration. "While the standard for design compatability for this site can recognize" the other office buildings, "the primary standard . . . must be that of the historic period," the 19th century row houses, in this case.

Lucy Franklin, a preservation office agent who also was involved in the case, said the new standard does not rule out high-rise construction in historic districts or mean that new buildings must be absolute replicas of the old, just that they be compatible with the area's architecture.

In addition to the Dupont Circle area, the city's historic districts are Georgetown, the Washington Navy Yard, the U.S. Marine Barracks, Logan Circle, Capitol Hill, Pennsylvania Avenue, Lafayette Park, LeDroit Park, 16th Street from Scott Circle to Florida Avenue NW, Anacostia, the C & O Canal through Georgetown, Gallaudet College and Massachusetts Avenue from 17th Street NW to Observatory Circle.

Preservationists hailed Thompson's decision as a major victory that they hoped would influence future development of Washington. "This is a landmark decision, a very, very important decision," said Harriet Hubbard, who testified for the Dupont Circle Historic Association. "If we hadn't won this, we might as well not have a historic district."

Washington developer Gerald Miller, whose company was to have constructed the building, said of the decision" "I do believe that you are limiting development to areas that do not have historic districts. I believe it will possibly affect anyone who wants to construct a building in an area with a historic district. I believe it's unfortunate for ourselves and for the District of Columbia."

Historic preservationists in the Dupont Circle area had waged a nine-month campaign against the IAM building. The building's design had been rejected four times by the Joint Committee on Landmarks, an advisory body that makes recommendations to the D.C. Historic Preservation Offices on whether permits should be granted.

That committee recommended that the IAM's permit be denied because the building would be incompatible with the low-level brick town houses at 19th and N streets NW, that would face one side of the building.

Those row houses were all built between 1875 and 1915, and all are below the level of the neatly cropped trees. Charlotte Burk, of the Dupont Historic Preservation Committee, had argued in the hearings that the side of the building facing those two streets was too flat, and its concrete facings incompatible with its neighborhood.

"It's a building that can go anywhere" in the city, Burk said yesterday. "There has been no attempt made whatsoever to relate it to this historic district."

Burk said the building would have cast a shadow over 19th Street, creating an ugly "dark corridor" at the southernmost entrance to the Dupont Circle historic district.

More and more office buildings have been built in the Dupont Circle area over the past few years, creeping northwest up Connecticut Avenue from K Street. The development was fueled by the opening of Metro's Red Line to Dupont Circle in 1976.

The IAM was unaware of Thompson's decision until late yesterday afternoon, but a spokesman, Pat Ziska said, "We're going to sit down with our legal staff" to explore the possibility of an appeal to the courts. The IAM also could resubmit new plans for the building to try to meet Thompson's objections.