For the second time in a row, the District of Columbia government yesterday failed to attract a qualified bidder for a choice parcel of city-owned property in Georgetown, sending city budget officials scrambling to avoid a deficit in the fiscal year that ends next week.

The city hoped to raise at least $4 million yesterday by auctioning off one of its most attractive holdings, the 53,376-square-foot site of the old Georgetown Incinerator, at 31st and Water streets NW and overlooking a proposed waterfront development.

But the only prospective buyer willing to post $400,000 in earnest money -- lawyer Leonard S. Melrod, representing 40 area businessmen and doctors -- was disqualified by the city's auctioneer when he tried to alter the city's 60-day deadline for reaching settlement on the sale.

On Tuesday, the city had planned to raise at least $2 million by auctioning off the old Corcoran School at 2715 M Street in Georgetown. But prospective buyers declined to bid, citing high interest costs, a slump in the local real estate market and zoning restrictions that would limit development possibilities on that property.

The incinerator site, within view of a proposed $154 million waterfront development, had no such zoning restrictions and city officials were highly optimistic about its auction prospects.

But those fizzled quickly yesterday, with potential buyers saying they were concerned not only about possible opposition from neighborhood groups and preservationists'delaying building plans but also about the city's terms of sale, which some considered unrealistic.

"There couldn't have been enough time to determine the highest and best use of the land," Melrod explained. "The terms were very tough and $4 million is a very high price."

"It would take time to develop the financing and gain the cooperation of the citizens groups," he said. "Frankly, I didn't think anyone was going to bid because of the onerous terms."

Melrod's group, the Demeter Corp., wanted to build a 240-room luxury hotel on the site and offered to pay $4 million if the city gave it a year to arrange financing and develop a plan acceptable to local resident groups that want to preserve the incinerator building as an historical landmark.

The city's auctioneer, G.B. Hawkins, rejected Melrod's bid after conferring with Jean Oliver, head of the city's surplus property office.

Melrod said afterwards that he realized in advance that it would have been unfair and probably illegal for the city to have altered the terms of the bidding at the last minute.

But he said he wanted to dramatize that the city's settlement terms were unrealistic, given the difficulty in arranging financing and reaching agreement with local groups, including Advisory Neighborhood Commission 3A and the Citizens Association of Georgetown.

The city's inability to find acceptable bidders for the two sites, first of 17 to be offered and the choicest among the lot, appeared to signal a major setback to Mayor Marion Barry's efforts to balance this year's budget by selling off $9.3 million worth of surplus city land.

Only two weeks ago, city officials confidently predicted they would end the fiscal year Sept. 30 with a $7 million surplus -- just as Barry entered what is expected to be the early phase of a campaign for election next year to a second four-year term.

Carolyn L. Smith, director of the D.C. Department of Finance and Revenue, said, however, that unanticipated inflationary growth in income and sales tax revenues would enable the city to cover its revenue needs, even without the land sales. "We will meet our revenue estimates," she insisted.

Smith said the city would collect $14 million more in income and sales tax revenues this year than the finance experts had anticipated, which she said would insure that the city would have sufficient cash to meet its obligtions. However, she was unable to say whether the city still would show a $7 million surplus without the revenues from the surplus land sales.

City officials waited until the last minute yesterday in hopes that someone would step forward with a legitimate bid on the incinerator property.

Sidney Brown, a lawyer and investor who said he wanted to bid on the property, was excluded from the auction for failure to post in advance a certified check for $400,000.

Brown said he had a commitment from the Capital City Federal Savings and Loan Association to deliver the funds to the city if his bid was accepted. Brown said it would not have been wise for him to give the city $400,000 at this point when it could be earning interest for him elsewhere.

"The District of Columiba is acting like a bunch of fools, like they usually do," Brown said. "They never knew how to make money and they never will. They just go to the federal government to get it."

The proposed sale of the incinerator site was to take place in the shadow of a law suit filed Wednesday in D.C. Superior Court by Mokhless Al-Hariri, a businessman who accused the city of having backed out of a 1979 commitment to lease the property to him to convert to a cabaret. The suit seeks $6.3 million in damages.

The Georgetown citizens association, leaders in the antidevelopment fight, has asked the D.C. Court of Appeals to overturn the city's approval of the $154 million residential and commercial complex along the Georgetown Waterfront.

In an appeal filed Wednesdasy, the association asked the court to stop the city from issuing building permits for the development while the judges decide whether to uphold or overturn the approval granted by the city's historic preservation officer.

Carol B. Thompson, the mayor's historic preservation agent, ruled on Sept. 12 that, contrary to the contentions of the citizens group, four proposed buildings conformed in height, style, texture, colors and appearance to the character of the Georgetown historic district to the north.