District police arrested 126 demonstrators who blocked the State Department's main entrance yesterday to protest the administration's finding that El Salvador is making progress in establishing human rights.

Those arrested, 81 men and 45 women, chanted "The people, united, will never be defeated" as they were led or carried one by one to waiting patrol wagons.

The protest did not disrupt operations in the building, a State Department spokesman said. The human blockade, which formed around the C Street entrance just after 10 a.m. yesterday, did not stop some visitors from entering through that entrance. Two other entrances, on 21st Street and on D Street, were not blocked and remained open.

While the demonstrators were outside, an early-morning fire, unrelated to the protest, sent smoke throughout the building and caused electricity to be cut off for a short time. The fire started at 7:45 a.m. in an electrical transformer in the basement, department officials said.

It was brought under control quickly and caused no injuries, authorities said. Emergency generators provided power for most of the building, said State Department spokesman Joseph Reap.

The protesters, joined by a group of supporters across the street that police estimated at 250, were criticizing Secretary of State George P. Schultz's message to Congress on Friday that the Salvadoran government, while "not perfect" or "as great as desired," has moved toward democracy and tried to curb human rights abuses.

As a condition for U.S. aid to El Salvador, Congress requires the administration to certify every six months that that country is improving its record on human rights.

The U.S. Embassy there says the number of people killed in political violence declined between 1981 and 1982, from 5,331 to 2,722. Critics of the Salvadoran government say those figures are low.

"As the Reagan administration escalates the war, they're going to face escalated domestic opposition," said Barbara Gottlieb, a spokeswoman for the Committee in Solidarity with the People of El Salvador, which organized the protest.

The protesters rallied on C Street, and then groups of four and five filtered across police lines and locked arms in a line under the building's roofed entryway. Officers warned that if they did not disperse, they would be arrested, and then moved in, frisking, handcuffing and photographing each protester before piling each into a patrol wagon.

Most of those arrested posted $50 collateral on the charge of blocking an entrance, a misdemeanor, and agreed to appear March 24 in D.C. Superior Court.