The Pennsylvania Avenue Development Corp. refused yesterday to condemn a downtown office building on a site that Western Development Corp. wants to add to its adjacent office and housing project at Market Square.

The owners of the building at Ninth and D streets NW said they would sue the PADC if it agreed to Western's condemnation request, and the prospect of a suit -- and the resulting construction delays -- appeared to be a major factor in the board's 7-to-4 vote in favor of the owners of the Federal Triangle office building.

PADC board member Carl L. Shipley said the "time, cost and delay" in a resulting lawsuit persuaded him to vote against Western's request.

Board member Lawrence B. Simons, who also opposed condemnation, said he was disturbed by letters to and from Western, PADC and another agency that suggested that PADC staff members had expressed behind-the-scenes agreement with Western's condemnation application. The letters had been discovered by lawyers for the office building's owners.

Yesterday's vote means that PADC will not acquire the 10-story building and Western will have to negotiate to buy it. PADC board Chairman Henry A. Berliner Jr. said he would help bring the parties together.

In November 1984, Western won the PADC competition to develop Market Square, across Pennsylvania Avenue from the National Archives. PADC had assembled the two-block site for development, but excluded the office building at the Northwest corner because the agency lacked the money to buy it.

Western, the developer of the Georgetown Park mall, had told the PADC the new development could proceed without the Northeast corner, but later tried several times to buy the building from the partnership that owns it. The offers were rebuffed.

Last October, Western asked PADC to take the building by eminent domain, meaning that the agency would first try to buy the building, and, if unsuccessful, would ask a court to condemn the property. If that case, PADC would take control at a price it would set with the owner, then sell it for that amount to Western.

Western said it needs the building to build a more attractive complex and improve its layout. In addition, the added space -- mostly to be used for offices -- would help pay for the 225 condominium units that PADC required and Western has said it would build. Housing downtown is considered almost economically unfeasible.

The building's owners made several legal arguments why PADC should not condemn, including saying Western had not made adequate efforts to buy the building, as required by PADC. The owners also argued that documents in PADC's files suggested "collusion" between PADC and Western.

Board member Simons said that "the integrity of the PADC process is at risk here" in that vote. "I feel very strongly that our reputation is at stake."

The building owners' lawyers also had raised questions about Thomas J. Regan's departure as PADC executive director in 1984 to go to work as a top Western official working on Market Square. The lawyers did not question Regan's integrity, but said PADC may not have given Regan adequate advice about the law governing federal officials who go to work in areas they formerly oversaw.

Regan has denied any wrongdoing and said he completely conformed to the law.

PADC board members said they will ask the Justice Department to review Regan's work for Western, although they suspected no wrongdoing.