In the face of vehement neighborhood opposition and a permit denial by the Arlington County Board, the Virginia Department of Motor Vehicles yesterday withdrew its proposal to build a two-story facility in south Arlington.

Donald E. Williams, the commissioner of the state agency, told the board that the department will submit a scaled-down proposal but could not say when that would be.

Residents of the Arlington Heights area said they would oppose any expansion of DMV offices in their neighborhood. They said a large facility would increase traffic and parking problems and would pose safety hazards.

"Have mercy on us and do not impose another facility on us," said Fred Schuppe, one of about 50 residents who attended the meeting.

The site in dispute is on Glebe Road at Fifth Street. A DMV trailer there has offered limited service such as driver's license renewals for 20 years.

To offer full service to county residents and relieve crowding at its Alexandria and Baileys Crossroads offices, DMV proposed replacing the trailer with a $2 million, 12,000-square-foot building.

According to the DMV proposal, the facility would serve about 500 customers a day, twice the number being served at the present facility.

"I've been giving excuses for not having a facility here," said Williams. "I've been telling people there's light at the end of the tunnel."

Williams said DMV will draw up plans for a one-story, 6,000-square- foot building. DMV, as a state agency, does not have to submit to county planning procedures, but did so voluntarily in this case.

Williams left open whether the agency would go ahead and build a smaller facility if the neighborhood continues to object. "It's kind of hard to say you'll totally back down," he said. "I'm hoping it can be resolved."

One suggestion that will be studied is whether space at the new county building under construction can be given to the agency for vehicle registration.

County board member John G. Milliken made the proposal, noting that residents must go to county offices each year to get vehicle decals and that the two functions might be combined. If space could be provided in the new county building, there would be less pressure to expand the current DMV facility, Milliken said.

In other action, the board denied a proposal to build a 12-story, 120-unit apartment building on the edge of Rosslyn because the project would violate county land-use policies calling for building heights to taper downward away from Metro stops. The building also would have increased development pressures on the nearby Colonial Terrace neighborhood, said board members.

The board also postponed for six months consideration of a plan to rezone part of a triangular block in the Clarendon area to purchase it for a park. The plan had been questioned by some area residents who said the park would be used mainly by office workers.