Two Montgomery County school board candidates have demanded that a newly formed political action committee stop using their names on campaign literature that they say is "full of red herrings and code words" and panders to racial fears.

Barry Klein and Timothy O'Shea, two self-described moderates, criticized the Committee for Traditional Education for passing out a news sheet this week that endorsed them and was bannered in bold print with: "Back to Busing or Back to Basics?"

The committee's literature, which first surfaced Monday at a candidates' forum, accuses the more liberal slate of four Education Political Action Committee Candidates of advocating forced busing and permissiveness.

The Committee for Traditional Education bears the name used by incumbent Joseph Barse in his primary campaign and that used by Suzanne Peyser and Marian Greenblatt in their 1980 campaign. All three incumbents, however, say the new Committee for Traditional Education has no connection to their groups.

The chairman of the new committee, John B. Clark, an unsuccessful board candidate in 1974, was active in Barse's and Carol Wallace's 1978 campaigns. In 1975, he and Wallace were founders of Montgomery Citizens for Education. Wallace, however, said she did not know about the group until Sunday.

"This piece of campaign literature is so inflammatory that we have to disavow ourselves from it," Klein said yesterday. "We have never accused EDPAC of being for forced busing and permissiveness and we're not doing that now."

"I'm afraid we'll have to decline Mr. Klein's and Mr. O'Shea's request," said Clark.