The Alexandria Redevelopment and Housing Authority last night rejected a proposal by public housing tenants to redevelop two blocks of public housing in Alexandria's Old Town neighborhood, virtually ensuring that the issue will return to federal court.

Transforming the dilapidated 100 public housing units, known as the Berg, into an attractive mix of public and private housing is proving a lengthy and heated process for the city's housing authority. Two years into the process, the issue already has been before federal courts and brought angry cries of racism and classism from some tenants.

At issue is whether the tenants and their partner, the District-based Telesis Corp., can win the right to redevelop the brick town houses and keep some of the profits, or whether a previously approved private developer gets to do the job. Last night, the authority voted 6 to 3 against Telesis and the Alexandria Resident Council, citing concern that the tenants' financing package was shaky.

One member of the authority, Joyce Woodson, who voted for the tenants' proposal, accused the authority's staff of trying to discredit it. "It's been an effort to disprove rather than an effort to assist," she said.

Federal law gives public housing tenants the right to be the developer when their homes are redeveloped, providing their proposal is financially sound and matches the best outside bidder. In 1997, when the authority approved McLean developer North Village for the project, the Alexandria Resident Council took the authority to U.S. District Court, claiming it was not afforded proper consideration, and won.

After last night's vote, the tenants said they would return to court.

"It'll just take longer, but the law's the law, and it'll be carried out," said Marilyn Melkonian, president of Telesis.

But Mayor Kerry J. Donley (D) said "further litigation, further delay is unfair to the people who reside in the Berg. That means they're going to reside that much longer in substandard housing."

Alexandria has 1,100 public housing units, more than any other Northern Virginia jurisdiction. Many of the units are more than 50 years old and stand on expensive land. The Berg is four blocks from the Potomac River and adjacent to $400,000 town houses.

Six years ago, the housing authority, with encouragement from the city's business community, decided to create a "new community," a mixture of public and private housing, on the two-block site. Existing public housing would come down, and only 52 of the 100 units would be rebuilt. Other residents would be relocated throughout the city. The 52 families who returned would live next door to middle- and upper-income town house owners.

Russell Rosenberg, president of Madison Homes, which is part of North Village, said he is confident his company can succeed with the virtually unprecedented project. "We believe it will work, although there are no real good examples that we're aware of anywhere in the country," he said.

The proposals by the tenants and North Village are similar. In addition to the 52 public housing units, there would be town houses and manor house condominiums, ranging in price from $150,000 to $300,000.

The tenant group and Telesis have proposed to give part of their profits--estimated at $1.7 million--to a community fund for social programs.