The protracted debate about auto insurance in Washington flared anew yesterday as the District's largest auto insurer began a campaign to block a City Council bill to repeal the city's controversial no-fault insurance law.

Council member John Ray (D-At Large), whose bill to repeal no-fault comes before the council Tuesday night, yesterday denounced the lobbying effort by the Government Employes Insurance Co. (Geico), which mailed out letters opposing Ray's measure to more than 35,500 of its policyholders here.

In another development, Mayor Marion Barry, at his regularly scheduled monthly news conference, abandoned an earlier position that he would veto any bill that repealed no-fault. Barry said he would sign Ray's bill if it is passed by the council.

The letter from Geico, mailed at a cost of about $7,500, is similar to a letter it sent out last summer as part of a lobbying campaign just before the council concluded months of bitter debate and passed the current law.

That letter resulted in thousands of telephone calls to the closely divided council. Council staffers reported less of a response to the latest letter, but they noted that it was mailed out only Monday and that more calls may come later.

"I'm sorry we have to write you again," says Geico's two-page letter, which included a rate chart and urged policyholders to express support for no-fault--and opposition to Ray's bill--to their council members.

Ray said that Geico's rate figures are "bogus" and that the company fears competition, which he said would be fostered under his bill.

Ray's bill would repeal the no-fault law, scheduled to go into effect Oct. 1, and instead would require District motorists to purchase regular liability insurance that is commonly sold in the city but is not now mandatory.

Under a system of liability insurance, personal injury and damages to vehicles are paid by the insurance company representing the driver who is at fault in an accident.

Under no-fault, personal injury claims from auto accidents are paid by the individual's insurer without determining which driver caused the accident. Property damages would continue to be paid based on which driver is at fault.

Council Chairman David A. Clarke, considered a swing vote on the issue, indicated yesterday that he would support the current no-fault law.

Clarke, in a letter to Barry, also urged the mayor to officially release figures compiled by the city government that show there is little difference between the cost of the no-fault system and that of the liability system, but that the no-fault system offers more protection.

Supporters of no-fault, who feared the law would be watered down or repealed, now believe the measure, with Clarke's support, may survive the repeal effort.

An effort by Charlene Drew Jarvis (D-Ward 4), an opponent of no-fault, to float a third alternative failed last week when it did not get Barry's support. Jarvis' bill would have adopted a system similar to Virginia's, in which drivers are not required to buy insurance but pay a penalty if they do not.

Trial lawyers have vigorously opposed the no-fault measure, contending that its limitation on the right to sue for damages in most cases is a denial of a civil right.

Supporters of no-fault contend that under their system, accident victims would be compensated quickly and without the need for expensive litigation.