Developer Jeffrey N. Cohen has scuttled plans to build a $51 million rehabilitation hospital for the physically handicapped on the site of the old Children's Hospital, where the development had been expected to help spur revitalization near the riot-ravaged 14th Street corridor.

Instead, the facility, one of the first of its type in the nation, will be built on the grounds of Washington Hospital Center, about two miles away.

The site change eliminates most of the criticisms leveled at the hospital by local and federal health planning officials, who had said it was too large and too costly.

Cohen said yesterday it also eliminates the financial risk for him and architect Theodore R. Mariani, who along with the late Samuel C. Jackson, a lawyer, proposed the project last year as the first step in a comprehensive renovation of the area around the old hospital, located at 13th and V Streets NW. The project was also expected to create 1,200 jobs.

D.C. City Council member David A. Clarke (D-Ward 1), who represents the area that includes both the old and new sites for the hospital, said, "The ultimate result of whether this is a loss to the neighborhood is not whether there will be a hospital, but what he Cohen puts in there. That's pivotal." Cohen said yesterday that he was unsure what would be built on the site.

John McDaniel, president of Washington Hospital Center, said the Cohen partnership would build the hospital, then lease it to the hospital center for 40 years at a price yet to be determined.

Hospital center officials would be solely responsible for the hospital's operation and expense, although the partnership, as owners and financial backers of the project, would be permitted to write off interest expenses and depreciation costs.

Local health officials and federal housing officials had seriously questioned the financial feasibility of the project since its inception, saying that its $51 million construction cost and proposed daily room rates of $700 were too high and suggesting that the facility should be affiliated with an existing hospital to eliminate duplication of costly equipment and laboratories.

Local health officials must approve a certificate of need to permit the hospital to be constructed and federal housing authorities are being asked to guarantee the mortgage.

By moving the proposed hospital to North Capitol Street and Michigan Avenue NE, on the grounds of the hospital center, construction costs should be reduced to about $35 million and room costs lowered by about $50 a day, McDaniel said.

McDaniel said that Washington Hospital Center officials had sought the new facility because many patients who now are treated at the center's shock trauma unit and burn center need the kind of additional treatment offered by a rehabilitation hospital.

"We have referred patients as far away as Philadelphia, New York, Chicago and even Denver" because the Washington area lacked a rehabilitation center where patients paralyzed because of gunshot wounds or traffic accidents could receive long-term care.

The new hospital will be physically connected to the present 992-bed hospital center. The rehabilitation hospital will have 160 beds and is scheduled for completion in 1985.

The new plans must now be approved by the local State Health Planning and Development Agency, which is a part of the city's Department of Human Services, after receiving a recommendation from a citizen's State Health Coordinating Council.

Council member Gottlieb Simon, a critic of the original hospital proposal, said yesterday that the new plans "at first blush look like it will be smaller and less costly, as we have been asking for, and will be operated by people who are health-care providers."

The campus-like setting of the hospital center already includes the new Children's Hospital and a veterans hospital. The center is owned by the Washington Hospital Center Health System, a nonprofit holding corporation that also owns Capitol Hill Hospital at 700 Constitution Ave. NE.