The District of Columbia government has halted the issuance of building permits in the 50-acre Capitol Gateway tract south of the Capitol to aid a private developer, who has an exclusive noncompetitive contract with the city for an ambitious $400 million real estate venture in the area.

The building permit suspension, approved by the D.C. City Council at the request of the developer's lawyer, represents a deliberate gamble with the city's future. The council and Mayor Marion Barry, who implemented the suspension last month, are betting that by halting land speculation and piecemeal development in the area now, they ultimately can increase the tax revenues and social benefits the area will generate under the private developer's overall plan.

The Capitol Gateway tract, a bleak cityscape of aging and abandoned commercial buildings wedged between South Capitol Street and the Washington Navy Yard, now is considered a lucrative target for redevelopment. To sweeten the pot, it also contains the site for a future Metro subway station.

Capitol Gateway also is an unusual partnership between government and private enterprise. City officials calculate that with a maximum outlay of $32 million in city funds, they can ensure the conversion of the tract that now returns only $200,000 a year in property taxes into a sparkling new multi-use community yielding annual tax revenues of $11 million, plus 4,000 permanent jobs and 1,800 housing units -- 20 percent of them for low- and moderate-income families.

The city has agreed to acquire 25 acres of privately owned land in the area, add 25 acres it already owns, install new streets and utility lines, raze the existing structures and turn the site over at cost to a Pittsburg developer that has a contract to create a complex of offices, hotels and apartments. The developer, a subsidiary of the Dravo Corp., was awarded the contract without competitive bidding in accordance with another contract it was awarded four years ago to create a master plan for the area.

After the city acquires the land in private ownership through its power of eminent domain, the developer will have to buy the land from the city at cost. The building permit suspension is an attempt to hold that cost down by cutting off the first stirrings of real estate speculation in the long-neglected area prompted by the future Navy Yard station of Metro's Green Line.

The move has triggered anger among the area's existing landowners and businessmen, who see a threat to their own chances of cashing in as property values rise, but Barry implemented it after the City Council declared that "blighted areas must be improved in totality and not in piecemeal fashion."

The title "Capitol Gateway" evokes splendid vistas of monumental Washington and access to the corridors of power. To a city government treasury awash in red ink, it means housing and tax revenue spilling out over a dismal landscape of urban failure, a new waterfront playground and a heavy weapon in the competition for jobs with suburban Rosslyn and Bethesda.

Nothing now on the site inspires such visions. Blocks of abandoned buildings and rutted streets bounded by a bus garage and a sewage treatment plant greet the visitor. But it has the three greatest assets of any parcel of real estate -- location, location and location.

The location is on the east side of South Capitol Street, between M Street SE and the Anacostia River. It has long been bypassed by prosperity. But it is only a mile from the U.S. Capitol, and the shortages of housing and office space in the District, combined with the planned construction of the Navy Yard subway station at Half and M Streets, have stirred the speculative juices.

The Capitol Gateway project is the D.C. government's attempt to stimulate and control the development of the last big chunk of close-in city real estate and the last stretch of prime waterfront, while at the same time ensuring public benefit in the form of planned land use, low-income housing, minority contracts and jobs, and community participation.

Critics of the project say the city's cost projections are illusory, based on underestimated land acquisition costs, proposed U.S. grants that are unlikely to be received and understated costs of providing city services to the new development. They also say that government involvement is unnecessary since private enterprise is ready to redevelop the area on its own, as it did the West End.

Every analysis by city officials and private consultants has found that the overall cost-benefit balance is strongly positive for the city and that the esthetic and social controls the District of Columbia gains by helping the developer are more than worth the cost. The City Council declared that the project "will yield substantial fiscal, social and economic benefits to the residents and government of the District." In effect, the city and the developer are partners in the biggest publicly sponsored development project since the old days of urban renewal.

The building freeze and the agreement with the developer were the relatively easy parts of the Capitol Gateway program. The hard parts lie ahead: obtaining federal grants for sewer and street construction, arrangement of financing by the developer, satisfying the local residents and businessmen on the issues of relocation and community participation and persuading reluctant landowners to accept the price the city offers for their property.

The story of Capitol Gateway begins with the Dravo Corp., a major construction and development firm that owns six acres of land in the area, the relic of an ill-fated purchase of a sand and gravel operation that now is defunct. The land was useless by itself, but potentially valuable if the rest of the area north to M Street were developed.

Dravo formed Capitol Gateway Corp. to plan and promote the development of the entire neighborhood. The board of directors consists mostly of Dravo executives, but there are three local members: Oliver Darden, president of Community Federal Savings and Loan Association; Flaxie M. Pinkett, a prominent realtor, and Vivian Williams, a community resident who works at Friendship House.

Capitol Gateway Corp., in the person of its legal counsel, William T. Hannan, senior partner of O'Connor and Hannan, sold officials in the administration of former Mayor Walter E. Washington on the concept of a comprehensive development plan for the area. In March 1977, the City Council endorsed a plan by the Department of Housing and Community Development to engage a private firm to prepare plans and feasibility studies. The council's resolution said the contract should go to "the most qualified single organization," which, as expected, turned out to be Capitol Gateway Corp.

The company was paid $200,000 to develop the master plan, but its real compensation lay in a clause giving the company exclusive rights to undertake the development itself if the mayor and City Council approved the plan, which they did last November. City officials said that now is the standard procedure for "community development" areas, as opposed to the old urban renewal system where the city asked developers to bid for the rights to implement plans prepared by someone else.

Capitol Gateway now is preparing detailed site plans and programs for community participation, minority hiring and waterfront development, which still must be approved by the city housing department and the council before work can begin. James E. Kerr, development administrator in the city's housing department, said he hoped that process could be completed by November so that site acquisition could begin.

The relationship between the city and Capitol Gateway has not always been smooth. When Hannan complained about delays at the housing department, director Robert L. Moore fired off a letter saying that "the District will not be stampeded into this project by you or your representatives on the Hill as you have attempted to do," a reference to Hannan's reputed connections in Congress.

In general, Capitol Gateway has obtained what it sought from the city. In February 1980, Hannan warned that a flurry of land transactions in the area threatened to drive up prices. Noting that one property had been sold for $10 per square foot, a tiny fraction of downtown land prices but a sign of rising interest in Capitol Gateway, he said that "spot development in this fashion will, if unchecked, completely thwart the aims and purposes of the city and make impossible the imposition of a coordinated plan." Hannan proposed a building permit freeze, which the City Council later enacted on an emergency basis almost as Hannan drafted it.

One property owner said the measure was "completely unconstitutional" because it amounted to taking of property without compensation, and he predicted it would be challenged in court.

Potential litigation is not the only obstacle still facing Capitol Gateway. The plan assumes that the city will get a $19 million "urban initiatives" grant from the federal Urban Mass Transit Administration to finance utility and street development. Kerr of the city housing department said he doubted that the program would proceed without that grant, but it is far from certain that the UMTA funds will be available.

"We're convinced the project has merit, but we have some questions about it," said Herman Shipman, who reviewed the city's application at UMTA's regional office in Philadelphia. Capitol Gateway was not included among the projects that will be funded this year, he said, but was "not at all precluded" from future consideration.