A special investigative grand jury yesterday recommended that Loudoun County Sheriff Donald L. Lacy resign from office, saying both his private conduct and his administration of the law enforcement agency amount to an abuse of power.

The sheriff responded last night by releasing a statement in which he emphatically denied wrongdoing, placed blame on people "determined to undermine my efforts" and pledged to serve out the four-year term to which he was elected two years ago.

The seven-member grand jury, convened in December to investigate allegations of sexual and financial improprieties, said the 34-year-old Republican office holder misused county funds, intimidated his deputies, violated hiring practices, helped cover up improper information in a search warrant and agreed to drop criminal cases at the request of his friends.

"The sheriff has made a fool of himself" at a restaurant near Dulles International Airport by drinking in public, the grand jury said in its strongly worded eight-page report which was submitted to Circuit Court Judge Carlton L. Penn. The jury, which Penn had empaneled, was not empowered under Virginia law to issue any indictments.

The report said it probed "numerous charges of questionable sexual misbehavior" against the sheriff but doubted any could be proved in court. "We do not feel these charges can be proved . . . , " the report said, "but there is certainly enough testimony to leave little doubt in our mind that these things are not without credence."

In his statement last night, Sheriff Lacy said the grand jury's report is "based on half truths and one-sided presentations by persons who have been determined to undermine my efforts to upgrade the sheriff's department."

Lacy, who ousted a Democratic incumbent on a promise to modernize the "country" sheriff's office in Leesburg, specifically denied misusing county funds or using improper practices in hiring, administration or in law enforcement. In an apparent reference to the jury's citation of an alleged drinking incident at a restaurant near Dulles Airport, Lacy said, "I have always conducted myself as a gentleman and know my friends will attest to this . . . .

"The level of smear that my apparent enemies have stooped to includes malicious and false rumors about sexual misbehavior," he continued. "They are vicious and untrue and I am sorry that my family has had to put up with these lies and rumors."

Richmond prosecutor Aubrey Davis, who was appointed special prosecutor last year after the allegations against Lacy surfaced, declined comment on the report, written by the grand jury after it interviewed 35 witnesses.

The report asserts that Lucy has been reluctant to cooperate with Virginia State and Fairfax County police "with the comment that 'they might steal the show.' " Lacy responded that "we have cooperated with all law enforcement offices, but, as in any community, there have been honest disagreements" that have been "helpful in clarifying areas of dispute."

The report declares that: "Intimidation has certainly been a factor in the sheriff's department since the present sheriff took office."

Once again denying impropriety, Lacy said "the amount of backbiting has been incredible" in the department, and several holdovers from a previous administration "conspired to force me to resign last fall and attempted a typical Latin-American-type coup d'etat."

In once instance, the grand jury said, Lacy participated in "attempts to cover up improper information" contained in a search warrant sworn out by Deputy Mark Gregory in a drug case. The grand jury said Gregory "committed perjury and admits the same" and should be "dismissed immediately and indicted for perjury." The report did not elaborate on the circumstances of the case.

Lacy again denied wrongdoing, responding that "the allegations against Deputy Gregory are not an adequate statement of the situation. It is not proper for me to discuss the details in public, but I have made a thorough investigation. . . and do not think any disciplinary action is merited."

Several weeks ago Lacy was charged with assaulting a 20-year-old woman during a New Year's Eve party at the Dulles Holiday Inn. The misdemeanor charges stemmed from a dispute with two women over whether the sheriff would be photographed.

The grand jury labeled that incident "an entirely uncalled for scene due to the sheriff's intoxication and poor judgment" and said Lacy had "made a fool of himself" there on several other occasions. The report also said it was "common practice" for the sheriff and his men to accept "gifts of free food and drink" from the Holiday Inn.

Lacy, asserting that he is a gentleman, said, "I don't expect that those who are determined to remove me and restore the Old Guard would do anything other than try and do a smear job on me."

The grand jury recommended that the sheriff's department, the only county law enforcement agency in Loudoun, be replaced by a police department.

The sheriff said through a spokesman that "a full-scale press conference" will be held today.