President Reagan has proposed a $20 million reduction in federal funds for the District -- a move that some city officials say would force them to cut services or raise taxes to build a new prison.

A proposed budget amendment from the Office of Management and Budget sent to Congress Tuesday would effectively eliminate a special $20 million appropriation that Congress approved last year to build a prison in the city. Instead, it would require that the prison funds be taken from other funds given to the District to reimburse the city for the cost of performing services for the federal government and in lieu of property taxes.

Some city officials said the $20 million reduction was tantamount to abolishing federal funding for a new prison because it would take the money from funds the federal government owes to the District. Mayor Marion Barry has said he is committed to building a new prison in the city, but only if it is paid for with federal funds and built on federal land.

According to City Administrator Thomas Downs, "It's too early to tell" whether the $20 million loss, if approved by Congress, would alter Mayor Marion Barry's commitment to build a prison in the city, or whether the city will build a prison without those funds. "It's something we obviously have to take a look at," he said.

However, Edwin L. Dale Jr., a spokesman for OMB, said the proposal still sets aside money for construction of a prison in the city. "There is nothing in this that sets back the cause of building a prison," he said.

He said the OMB opposes the special appropriation for the prison "because we have a $200 billion budget deficit and we have to save money."

The proposed amendment is the latest twist in a weeks-long prison crisis in the District sparked by the federal government's decision in January to stop housing city inmates in federal institutions. The agreement was made to help the city deal with overcrowding at the D.C. Jail, which has a court-imposed ceiling of 1,694 inmates.

Federal officials have said they will consider resuming the agreement only if the District makes progress on building a new prison and finding short-term housing. In the meantime, overcrowding at the jail has forced city officials to frantically transfer inmates to other facilities and to hold inmates on buses for as long as 10 hours while they search for space.

In recent days, city officials attempted to house inmates in a private prison and open an emergency jail at 525 Ninth St. NE, but both efforts have been thwarted.

Meanwhile, city officials received permission yesterday from the Joint Committee on Judicial Administration at D.C. Superior Court to renovate the basement cell block in old Superior Court Building B, 409 E St. NW, so that it can hold persons sentenced by judges to spend the weekend in jail.

Officials said they hope the renovations, which include installing sinks and showers, will be completed by Friday. The facility is expected to house between 50 and 100 inmates.

D.C. City Council member John A. Wilson (D-Ward 2), who heads the council's Finance Committee, said Barry "left himself open" for an attempt to reduce the funds by not moving more quickly to find a site for the new prison. Congress mandated last year that the city must submit a detailed prison construction plan for congressional approval before the funds become available -- an action that City Council members say is still in the works.

"We should have spent it while we had it," Wilson said. "The procrastination and inactivity of the administration on this issue creates this kind of situation."

Council Chairman David A. Clarke said if Congress approves the OMB reduction, the city should refuse to build the prison in the District and should construct it at Lorton Reformatory in southern Fairfax County instead. "The theory was we had to build a prison in the city because the feds were paying for it. If we're going to be paying for it, I think we ought to be able to say where it goes," he said.

Clarke said city officials were counting on the money that would be used for the prison under the OMB proposal for other needs and would have to make up the shortfall "in cuts to services or by raising other taxes."

At a news conference yesterday, Barry said he was "tired" from late-night hours trying to resolve the overcrowding issue and planned to announce "a fairly comprehensive approach to take care of our immediate needs" by Friday.

He said he plans to build a 600 to 700 bed jail in the city but is still struggling with the question of its location.

The Justice Department has repeatedly said the city needs 2,000 additional beds for inmates, but Barry said they are "posturing. We don't need posturing, we need solutions."

He also complained that Justice Department officials are "procrastinating" by not responding to two of his letters on proposed prison sites.

"We have a jail crisis . . . We are every day trying to juggle prisoners," the mayor said. "I don't have control of all the aspects of the correctional system. If I did I could solve the problem faster."

One D.C. council official, who asked not to be named, said "the thing that's really curious in all this is that the Justice Department appears supportive of us building a new prison," while the OMB is trying to cut funds.

"It's almost as if the OMB didn't know what was going on here."

The proposed reduction of $20 million would affect the District's funds for fiscal year 1987, beginning this October.

Sen. Arlen Specter (R-Pa.), who fought for the $20 million as a separate appropriation for the prison last year, could not be reached for comment on the proposal's chances of passage.

Congress approved a two-year, $30 million appropriation for a new permanent prison in the District -- $10 million in 1986 and $20 million to come in 1987.

Under an emergency clause in the appropriation bill, the city is using the first installment for the construction of four 100-bed modular housing units at Lorton Reformatory, but must repay the money to the permanent prison funds.

In another development yesterday, the city filed papers in response to one of the three contempt of court proceedings pending against it.

A D.C. Superior Court judge has ordered that Corrections Director James Palmer show cause why he should not be held in contempt of court for transferring an inmate with three previous convictions to a work-release program without the judge's approval.

In its response, the city said the man was returned to the D.C. Jail when the error was discovered and that Palmer has developed a new form letter to inform judges when inmates are eligible for placement in a halfway house, which the city said would prevent the problem from recurring.