The national movement during the last two decades to get mentally ill patients out of large institutions and into normal community life has ended up hurting those it intended to help, dumping many of them onto urban streets, several mental health specialists told a congressional panel yesterday.

"The mentally ill are bleeding and dying on the streets of America," said Dr. Rodger K. Farr, founder of the Los Angeles Skid Row Mental Health Program. "The streets have become the asylums of the 1980s."

J. Theodore Brown Jr., chief psychologist at D.C. General Hospital, said it is not uncommon for him to see three or four people in a day who cannot get the psychiatric care they need because he cannot put them in a hospital and appropriate services for them are unavailable in the community.

"Clinically it's wrong; morally it's wrong. I know it's wrong . . . but my hands are tied," Brown told the House District Committee's subcommittee on fiscal affairs.

Deinstitutionalization of the mentally ill was a civil rights issue in the 1960s and 1970s, and both legislatures and courts established a standard that patients should be put in the "least restrictive setting." This meant that many were released from state mental hospitals.

Mental health specialists and federal and state policymakers are rethinking this standard now, saying that communities did not have the support systems necessary to make massive deinstitutionalization work.

Rep. Stewart B. McKinney (R-Conn.), ranking minority member of the House District Committee, has introduced legislation to require that mental patients be placed in "optimum therapeutic settings," rather than the least restrictive setting, and to make states plan and guarantee adequate mental health care in communities for patients before releasing them from state mental health facilities. The subcommittee hearing yesterday focused on this legislation.

McKinney said that "it is evident that the implementation of our original deinstitutionalization goals have been a failure at the very best . . . . I think in the rush to do right by the mentally ill we have replaced the institutions with the cold sidewalks of the East Side of New York and Southeast Washington."

Norman Rosenberg, director of the Mental Health Law Project, which was instrumental in winning court decisions for deinstitutionalization, disagreed and opposed changing the standard from the least restrictive setting.

Rosenberg said in an interview that McKinney's bill would reduce the pressure on local governments to develop appropriate community mental health facilities and would mean that states would go back to relying more on institutions.

But Farr testified that states have saved money "on the backs of the chronically mentally ill" by deinstitutionalizing them without adding mental health services for them.

D.C. Del. Walter E. Fauntroy, subcommittee chairman, estimated that there are 12,000 homeless people in the District and that half are deinstitutionalized mental patients.