The staff of the District's health planning agency says the owners of Capitol Hill Hospital should be allowed to convert it into a nursing home but should retain the emergency room and a small medical-surgical unit.

The staff recommendation, which will be considered by the head of the agency before a decision is made, is a new twist in the months-old dispute between the owners of the hospital, who want to turn it into a nursing home, and the local coalition that is trying to maintain its services. If followed, the recommendation would be a complete victory for neither side.

Agency Chairman Carolyn Graham has the authority to decide what happens to Capitol Hill Hospital, one of the city's smallest, with 142 acute-care beds and 30 skilled nursing beds. The hospital is at 700 Constitution Ave. NE, near low-income neighborhoods that depend on the hospital rather than private doctors for primary care.

Graham has indicated that she will make a decision by Feb. 20, after weighing the owners' application, the staff report and other advisory opinions.

D.C. Council member Harold Brazil (D-Ward 6), chairman of the Coalition to Save Capitol Hill Hospital, said yesterday that the recommendation was "totally unacceptable and inconsistent with what the court ordered and what the new mayor has indicated is the direction she wants to go."

A D.C. Superior Court judge ruled in mid-December that the hospital owner, Medlantic Healthcare Group, must obtain permission to close from the D.C. State Health Planning and Development Agency before converting the facility into a nursing home.

The staff report was presented last night to the agency's project review committee, despite efforts by the coalition to remove it from the agenda.

One tense moment during the four-hour session came when committee Chairman Malinda Carter told Medlantic Vice President John L. Green that she was astonished at his company's failure to anticipate the losses at the hospital. "I feel like you are playing us for fools," Carter said.

But Green said Medlantic had been overwhelmed by the economic downturn and other changes in the health care field. "We are not at all trying to manipulate this body," he said.

The committee eventually voted to adopt the staff recommendation that would allow Medlantic to convert the hospital into a nursing home, but dropped the recommendation that it retain the emergency room and medical-surgical ward. Its recommendation now goes to the full advisory group, which is scheduled to meet Feb. 7.

The recommendations of the advisory panel, the project review committee, the staff and individuals and groups such as the coalition will all be taken into account by chairman Graham, just as a judge considers the testimony and evidence from all witnesses in deciding a case.

Coalition spokesman Rick Ehrmann said he was stunned by the vote. "I'm very unhappy with it," he said.

Medlantic, on the other hand, was pleased. "That concurs with our viewpoint," spokesman Phillip Schneider said.

The report says the combination of services that the staff recommends would enable the facility to improve its financial situation while providing the community continued access to some acute-care services.

Both the staff and the project review committee members said they were supporting the proposed conversion because the District has an adequate number of hospital beds but an inadequate number of nursing home beds, based on population.

Last fall, Medlantic officials said they might be forced to close Capitol Hill because of heavy financial losses. One Medlantic official estimated that the hospital lost $5.2 million in fiscal 1990 and could lose as much as $10 million by the end of this fiscal year.

But the coalition working to save the hospital contends that it could be profitable if it were better managed. The coalition has staged demonstrations, held prayer vigils and filed a lawsuit to try to block the conversion to a nursing home.

Union officials expect that many of the 700 workers at the hospital would lose their jobs in such a conversion. About 100 workers have resigned in the last four months, said coalition spokeswoman Valerie Gonzalez.

She said that the hospital has posted notices on its bulletin boards indicating that applications are being accepted for jobs that will be open after the facility is turned into a nursing home.