The sudden political demise of Jose Gutierrez, the highest ranking Hispanic in D.C. government, sprang from his own misreading of his clout within Mayor Marion Barry's inner circle and of Barry's sensitivity to charges that city contracts are awarded for political reasons, according to sources close to the situation.

In openly criticizing the city's contracting practices, Gutierrez chose as his prime target City Administrator Thomas Downs and, in effect, asked the mayor to choose between him and Downs.

Gutierrez first complained to Hispanic leaders and then to the press that Downs repeatedly tried to pressure him to award city contracts for political purposes, including up to $20 million in city telephone contracts to the Chesaepeake and Potomac Telephone Co. Delano Lewis, who as C&P's executive vice president here is leading the effort to win the contracts, was a top official in both of Barry's mayoral campaigns.

Downs said Gutierrez's allegations were "categorically untrue."

The mayor responded by demoting Gutierrez to a post in the D.C. Planning Office and ordering a full-scale internal investigation into whether Gutierrez violated laws or city ethical standards while serving as the head of the Department of Administrative Services, the city's chief purchasing agency.

Explaining why he virtually excommunicated his aide last week, Barry said that Gutierrez had shown a "lack of respect for the family creed" by taking the unprecedented step of openly criticizing the administration.

Gutierrez, a longtime Barry aide who helped line up Hispanic support for the mayor during his first mayoral campaign and later served as head of the city's personnel office during Barry's first term, said he was shocked and incensed by the mayor's actions. "He's trying to shut me up and shut up any other government employe who is thinking of talking," Gutierrez said last week.

But other city officials said that Gutierrez's mistake went far beyond speaking out. They said he grossly underestimated the importance Barry attaches to having Downs, a career public administrator with a national reputation, heading up the city's often-criticized bureaucracy.

According to one City Council member familiar with the mayor's thinking, Barry views Downs "as a real apple in his hands" because Downs provides a mantle of professionalism that is in contrast with the mayor's own image of being a consummate politican.

"Tom gives Barry more credibility than anyone else in government," the council member added. "Tom Downs is a pretty all-American boy. Tom is sort of sneaky smart. He doesn't look very smart, but he's pretty clever. He knows how to cover himself " and to gain the upper hand in bureaucratic battles.

Gutierrez's criticism also struck two longstanding flashpoints of concern for the admininistration: allegations by Barry critics that Barry has injected too much politics in the awarding of city contracts and complaints by Hispanics that the administration has neglected them in terms of city jobs and contracts.

The D.C. government awards about $163 million a year in contracts, with 35 percent of the total set aside for certified minority contractors. Since taking office in 1979, Barry has broadened his political base partly by helping black businessmen obtain city business.

As a result of Gutierrez's allegations, two Barry critics on the City Council, Betty Ann Kane (D-At Large) and John Wilson (D-Ward 2), renewed their complaints that politics plays too big a role in the awarding of city contracts. They joined City Council member William R. Spaulding (D-Ward 5), chairman of the Government Operations Committee, in calling for an investigation of city contracting procedures.

While some council members are sympathetic to Gutierrez, they are waiting to see if he can substantiate his allegations before they get into a public fight with Barry.

As one high-ranking council aide put it: "I haven't seen any impropriety on behalf of Downs. He may be doing what his policy chief the mayor told him. That's his job, or he should leave."

Gutierrez's charges that Barry has done little to help struggling Hispanic businessmen struck a responsive chord both within the administration and among some Hispanic leaders.

"We are tired of being 'team players' but never getting passed the ball," said Enrique Rivera-Torres, president of the Council of Hispanic Community Agencies, a group of about 20 D.C. social agencies that assist Hispanic people. Rivera-Torres added that he was "astounded and outraged" at Gutierrez's demotion.

However, another group, the Institute of Afro-Latin American Studies, charged that Gutierrez was polarizing the black and Hispanic communities for the sake of "personal ambitions."

Barry conceded in meeting with Hispanic city employes and others that he needs to do more to help the Hispanic community; and again he criticized Gutierrez for publicly airing his complaints before talking things out within the administration.

A close supporter of Gutierrez said that Gutierrez tried for months to get the mayor to listen to his concerns about what Gutierrez believed was Downs' meddling in the contract process of the Department of Administrative Services.

Gutierrez detailed more than 20 specific instances of disagreement with Downs during the last two years in a memorandum he sent to the mayor Feb. 14, four days before a showdown meeting at which it was decided that Gutierrez would step down as director of administrative services and take a lesser cabinet post as director of policy and program evaluation.

According to Gutierrez's memo, his friction with Downs went as far back as early 1983 when the two clashed over the proposed structure of the Department of Administrative Services, which began operating in March 1984.

Gutierrez has said that he would welcome an investigation of his activities for the city but that Barry's administration is not interested in an objective look at his actions. Gutierrez said that a clear sign the administration merely wants to discredit him is that the mayor has not ordered an examination of the allegations about Downs.

Gutierrez and others also note that the investigation is further undermined because it is being conducted by Herbert O. Reid Sr., a trusted Barry adviser and longtime legal aide, rather than by the city inspector general's office, which usually investigates such charges.

The events that lead to Gutierrez's demotion began in mid-February when Barry decided to ease Gutierrez out of his job at administrative services and transfer him to a policy evaluation post, which was about to be vacated by Gladys W. Mack.

On Feb. 18, Gutierrez was summoned to an unusual meeting with the mayor and his two closest advisers, Elijah Rogers and Ivanhoe Donaldson, in the conference room of the Alexander Grant & Co., the accounting firm that Rogers joined shortly after stepping down as city administrator at the start of Barry's second term.

Donaldson, the former deputy mayor who masterminded Barry's two mayoral campaigns, and Gutierrez had been friends for years, and Gutierrez had counted on him for support, according to sources close to Gutierrez and Barry.

Gutierrez also thought he could count on Rogers -- clearly a miscalculation in view of Rogers' relationship with Downs, whom he groomed to succeed him as city administrator. Rogers and Donaldson tried to smooth over differences, but by the end of the meeting, Gutierrez had agreed reluctantly to the transfer.

However, according to a source close to Gutierrez, the deal was contingent on Barry's promise that he would publicly praise Gutierrez and would end what Gutierrez viewed as a campaign of rumors questioning his integrity.

Barry announced the transfer March 7, but the next morning the agreement began to come unglued with a report in The Washington Post that Guiterrez's transfer was linked to criticism of his performance by Downs, particularly Gutierrez's handling of leases for city office space.

Both Gutierrez and Hispanic leaders viewed the reported criticism of Guiterrez as an affront and a violation of the understanding between the mayor and Guiterrez.

After outlining his complaints to a meeting of Hispanic leaders, Gutierrez repeated them in the press on March 23.

Two days later, a messenger appeared at Gutierrez's house with a letter from the mayor notifying him that he had been demoted.