The District's mental health system "remains largely dysfunctional," with hundreds of mentally ill patients unnecessarily hospitalized, despite a decade of promises to provide more community-based services for the city's 8,000 mentally ill people, a court-appointed watchdog group said yesterday.

The committee also said in the report, filed in U.S. District Court here, that the city largely had failed to implement an agreement announced with fanfare last year by Mayor Marion Barry to transfer 200 patients from St. Elizabeths Hospital to community housing by the beginning of this month, and another 200 by the end of 1991.

"The bottom line is we spend a lot of money -- more than most states -- and our mental health services are not meeting the needs of the people," said Claudia Schlosberg, coordinator of the Dixon Implementation Monitoring Committee. "You still have the equivalent of a state mental hospital, which is warehousing hundreds of people and can't get them back in the community."

In its yearly report, the committee said that although the D.C. Commission on Mental Health had complied with a number of requirements in the 1989 agreement, it had failed to "comply with the requirements most critical" as mandated under the original court order issued in 1980, including providing adequate follow-up care and staffing at the city's community mental health centers.

Robert A. Washington, the District's mental health commissioner, said yesterday he agreed with the committee's findings that not enough St. Elizabeths patients had been transferred to housing. But he blamed that fact on the high cost of city housing and a reduction in available city rent subsidies.

He said the commission plans a bond issue for housing throughout the city for the mentally ill. He added that this could save the city $10 million a year. It costs about $290 a day to house a patient at St. Elizabeths, where there are about 1,300 patients.

The "one bright light" in the city's mental health system, the committee found, was a program to provide special services for 100 homeless residents who also are mentally ill. The committee also commended services provided by the commission's Emergency Psychiatric Response Division, but said that communications between this division and others in the commission were poor.

In addition, the Dixon Committee also raised questions about a list, provided by city officials, of residences to which 108 patients have been moved.

A preliminary review shows that two addresses do not exist, and one was a burned-down building, the committee said. In addition, the committee said, some former patients could not be found at the other addresses and were unknown to other occupants.

The committee found that some information kept by the emergency division in its computer tracking system of the city's mentally ill patients was incorrect. For example, the committee said, John Hinckley Jr., who shot President Ronald Reagan, was not listed as a "White House case."

The city has been under a broad court order since 1980 to improve community services for the mentally ill and transfer patients out of St. Elizabeths, the psychiatric hospital administered solely by the District after the federal government relinquished control in 1987.

The 1980 order, issued as a result of a 1974 class-action lawsuit, arose from the premise that mentally ill patients were entitled to treatment in the least restrictive setting possible. The 1980 order was followed by a 1987 agreement, and another in 1989, both hammered out after the committee complained that the commission failed to abide by the 1980 order.