The District government has taken the unusual step of canceling a city contract with the agency it has long used to provide services for the elderly in much of Southeast.

In taking the action, city officials cited the financial difficulties of Southeast House and concerns about whether it was capable of expanding services to the elderly.

Southeast House, 1225 Maple View Place SE, had been one of six lead agencies that the Office on Aging contracted with to oversee a range of nutrition, social and transportation programs for the city's estimated 109,000 senior citizens. Each agency looks after the elderly in a specific geographic area.

Termination of the Southeast House contract breaks a relationship that dates back nearly a quarter of a century. Southeast House has been an important member of the network of city services for elderly residents since the mid-1970s, when council members Polly Shackleton and Marion Barry collaborated to push through a law establishing the D.C. Office on Aging.

The contract continued throughout the Barry administration, even after a pattern of financial irregularities at Southeast House was reported. In the late 1970s, the agency's board of directors discovered a $112,000 deficit and two cases of alleged embezzlement.

Southeast House, established in 1929, filed for bankruptcy nearly six years ago because of tax difficulties, according to James A. Bellamy, its executive director. He said the agency failed to pay employee payroll taxes to the D.C. and federal governments in the early 1980s. Penalties and interest have pushed the agency's tax bill to about $300,000, he said.

E. Veronica Pace, director of the Office on Aging, said she notified Bellamy in a meeting in July that his agency's $421,000 contract would be terminated as soon as a replacement was found. The termination occurred Dec. 1.

Bellamy said Southeast House took steps to alleviate some of its indebtedness by pressing for passage of a bill that would have eliminated the estimated $109,000 in back taxes owed to the city. The bill, sponsored by then-council member Nadine P. Winter, was introduced in August but died in committee in the final days of December.

Another issue, Pace said, was Southeast House's failure to expand meal services and other programs for the elderly in its service area, which included Wards 6 and 7 east of the Anacostia River. The number of older persons served at group meal sites operated by Southeast House had been shrinking in recent years, she said.

"We worked with the agency over a long period of time, hoping to see some positive movement, but there was not sufficient progress," Pace said.

The contract was transferred to Greater Southeast Center for the Aging, 1380 Southern Ave. SE, without any interruption of services, Pace said. Greater Southeast will oversee the operation of 10 group lunch sites serving 300 people each weekday, deliver meals to an estimated 460 homebound elderly residents and provide transportation and other services.

The 22-person staff employed by Southeast House to administer the elderly services has been moved to Greater Southeast Center, said Gloria Anderson, president of the center.

Bellamy said his agency is struggling to resolve its financial problems with about seven remaining people.

Southeast House still holds two other contracts, Bellamy said. One is a $230,000 community services block grant of federal money for housing assistance and employment help. The other is a $24,000 grant from the D.C. Department of Employment Services for job training for young people.