D.C. police were called to a vacant lot on Capitol Hill in the middle of one night last week after neighbors reported that workers were starting to replace a billboard that has been at the center of a four-year battle between residents and an advertising firm.

Residents said a bartender at Mr. Henry's Capitol Hill Restaurant was closing up about 3:30 a.m. July 4 when about 10 workers in four trucks pull up at Sixth Street and Pennsylvania Avenue SE, jumped out and began hacking down brush and repairing rusty sign supports to put up a new billboard.

"They were working away. I drove up and said, 'Do you have a permit?' and they said, 'Yeah. It's back at the office,' " said Jack Mahoney, president of the Capitol Hill Association of Merchants and Professionals.

Police arrived a few minutes later, and witnesses said the workers told the officers no permit was needed. Police ordered the workmen to leave.

"We are being deprived of the legitimate use of our property," said Tom Somers, general manager for Reagan National Advertising Inc., which owns the site. He said Reagan had planned to install two public service announcements for the Kiwanis Club and the Prince George's County Lodge of the Elks Club.

Residents say that after the company removed a billboard from the site several years ago, the city ruled that no new billboard could go up on the 20-by-90-foot lot.

"To me it's just outrageous that these people would roll up here at 4 in the morning and think they would be able to put it back up . . . . Billboards have no place in a historic district," said Don Denton, a real estate broker.

The controversy dates back to 1986, when the Reagan firm took down a 12-by-25-foot billboard that had occupied the corner lot for nearly half a century. Over the years the sign, which is six blocks from the Capitol, had advertised everything from Clint Eastwood movies to suntan oil. In recent years, residents had called it an eyesore.

The company removed the sign with the idea of modernizing it. Somers said the company was trying to appease neighbors who had complained about the condition of the sign.

But once it was down, the residents petitioned city officials to stop its replacement, citing regulations that protected existing billboards but said that no new billboards could be installed in District residential neighborhoods.

In fact, under the regulations, which were passed by Congress in 1931, new billboards can be placed only in industrial areas.

"We sort of lucked out. {Reagan} made a mistake by tearing it down," Mahoney said. "They could have repaired it piecemeal."

Reagan executives contended that the city was wrong. "The inspector came out and said we needed a permit. We contended that we didn't" said Somers.

At one point, Reagan even tried to persuade the city to allow the new sign by offering to reduce its size by 20 percent, landscape the property and add benches for a park. Somers said the company, which owns 28 billboards in the District, has lost $400,000 in potential revenue since the sign was removed.

But Capitol Hill opponents have stayed vigilant and say that two other times when Reagan workmen have tried to rebuild the signs, they have called the police.

"To put up a billboard in the middle of the night . . . . That's just underhanded," said Hal Hiemstra, policy director for a national advocacy group, Scenic America.

Somers said workmen were too busy to put up public service announcements at any other time and doing so in the early morning eliminated parking hassles.

"If we go down there in the day, there's no place to put the truck," he explained.

Residents said they plan to petition the city to have the billboard supports removed to make it tougher for a new billboard to be installed.

Somers said the company's position remains that it does not need special authorization to replace the sign. City officials said a new billboard is not allowed there without a permit. They also said they are investigating the incident and would be meeting with Reagan representatives in the next few days.

"This is a great group of people to work with from a community standpoint, because they were Johnny right on the spot," said Hampton Cross, administrator of the D.C. Buildings and Land Administration, which oversees billboards in the city.

Residents say they will keep watching. Dick Wolf, a member of the Capitol Hill Restoration Society, said that if a billboard goes back up, they would have to take legal action to to have it removed.

He said, "This thing could be strung out for a long time."