Federal housing officials are withholding $5.3 million of $21.2 million in community block grant funds currently due to Washington because of what they call the city's continuing "unacceptable performance" in spending the money.

The action marks the third consecutive year that federal officials have refused to release a portion of the funds in an attempt to force city officials to comply with federal regulations for keeping track of the money, which finances a wide variety of programs for low- and moderate-income families.

In the two earlier years, the funds were released eventually. HUD officials said yesterday they will review this year's situation in March.

"As a result of the District's unacceptable performance reiterated through written and oral correspondence, the special conditions and sanctions . . . are hereby imposed," U.S. Department of Housing and Urban Development area manager Terry Chisholm said in a letter to D.C. Mayor Marion Barry last October.

Acting city housing director Madeline Petty could not be reached for comment yesterday, after HUD officials confirmed the decision to withhold the funds.

City housing officials told a City Council budgeting hearing last month that they had created a special fund for the community development funds to monitor expenditures better. HUD officials repeatedly had asked city officials not to mix the community block grant funds with general city revenues.

Chisholm wrote the mayor that Washington needs a financial management system that "at a minimum will exhibit the city's control over and accountability for all funds, property and other assets" and allow easy comparison of funds received to funds spent.

In addition, HUD officials have withheld $4.2 million of the currently due community development funds to pay off the city's urban renewal debt, which now totals about $25 million. Since the inception of the community block grant program in 1975, the federal government had withheld nearly $40 million in District funds to help pay off the city's urban renewal debt.

The city intends to pay the urban renewal debt with revenues from the sale of city land for downtown redevelopment projects, but so far no major parcels of land have been sold.