Mayor Marion Barry has canceled his plans to lay off 204 D.C. police officers by the end of the year -- a budget-cutting proposal that drew fire from both the police department and Capitol Hill.

Police Chief Burtell M. Jefferson said yesterday that he and Barry determined during a meeting Friday that enough officers would take part in a new, early-out retirement plan to make the layoffs unnecessary.

The proposed layoffs, which would have begun Oct. 1, the beginning of the 1981 fiscal year, were part of Barry's program to handle the District's severe and worsening budget crisis.

Barry said repeatedly earlier this year that the layoffs were necessary to balance the 1981 budget. But firing police officers turned out to be an unpopular move both within the department and in Congress.

Jefferson warned in May, shortly after Barry announced the layoffs, that losing the officers could cause an increase in crime. Reported crime is already rising sharply in Washington.

Jefferson also said the department would have to cut back its patrol assignments, and would be unable to handle some large demonstrations. In addition, Jefferson said, response to calls over the emergency 911 phone line would be slower.

The proposal was attacked on Capitol Hill. Much of the growth of the D.C. Police Department -- which at nearly 4,000 members is consdered too large by some municipal experts -- was directed by Congress and the White House.

Rep. William Natcher (D-Ky.), a longtime supporter of a strong police presence, moved to change Barry's proposed 1981 District budget to provide enough funds to retain the 204 officers. Final action on that proposal has not been taken.

But even if no extra funds are provided, Jefferson said yesterday, there will be no layoffs.

"Regardless of what Congress does, we've been able to adjust," Jefferson said. "Even if they don't give us the money, we won't have to lay anybody off."

Jefferson said keeping the officers is possible because more members of the department than expected have indicated they are willing to take advantage of a new, early retirement plan.

The plan was approved earlier this year by the City Council and the mayor. Congress, however, has not yet acted on the new retirement program, so it is not yet in effect. Jefferson said he expected congressional action by the end of the month.

Under the plan, officers would be able to retire -- at a reduced benefit -- after 18 years on the force, compared with the standard plan requiring 20 years of service.

According to Inspector Isaac Fulwood, director of financial management for the police department, 247 officers have indicated since July that they want to retire. Fulwood said that approximately 160 of those officers want to go under the early-out plan, while the rest will take regular 20-year retirement.

Jefferson said the retirement would balance the planned layoff because many of those retiring are sergeants and lieutenants and are paid more than the rank-and-file officers who would have been laid off. He said the department is still working on an analysis of precisely how the savings would balance.

Jefferson said the department is making other savings in personnel costs, primarily through a slowing of the rate of promotions. When sergeants and lieutenants retire, Jefferson said, the department will delay in promoting lower-ranking officers to take their places.

Layoff notices have been scheduled to go out to the 204 officers several times during the summer, but on each occasion they were withdrawn.

Barry and his aides said all along that the layoffs would occur, though before presenting his latest budget proposals on July 21, Barry indicated that retirements might at least decrease the number of officers to be fired.

Several notices were actually sent last month, and one female officer fainted after receiving hers. The notices were hastily recalled.