James Schlesinger's report to the State Department on the American Embassy in Moscow has raised the curtain on Act III of an ongoing farce. Act I, you may recall, was the revelation of a time-sharing deal with the KGB: Americans had access to the current embassy by day, and the Soviets had access by night. Act II was the discovery that, lo and behold, all that concrete in the new U.S. Embassy -- precast by the KGB and installed by Soviet workers -- was chock-full of listening devices (who would have suspected such a thing?).

Now, in Act III of the Foggy Bottom follies, the Schlesinger report unveils its ingenious ''solutions'': 1) learn to live with the KGB-penetrated lower five floors; 2) rebuild the upper three stories and pray that they, too, will not be compromised; 3) adjacent to the structure -- which is, in effect, a giant KGB transmitter-receiver -- build a small embassy annex. As Napoleon once said: ''There are limits to rascality, but there is no limit to stupidity.''

Schlesinger reported to the secretary of state: ''we do not yet understand either the technology {of the Soviet intelligence devices} or the underlying strategy.'' If we admit we don't understand either the technology or the strategy of the Soviet penetration of our embassy, then how can we hope to counter it? Schlesinger added that it would take five years to dig out all the bugs, and even then there would be no guarantee the building was clean.

Common sense dictates that to gain such a guarantee, you must take the building apart -- literally and totally. To remove all the bugs, we must remove the building. Yet the State Department refuses to acknowledge this basic fact.

If we leave the first five floors of the new embassy compromised, how can we possibly be confident of security in the rebuilt upper stories? The answer is, we can't. So under the State Department plan, we end up with an eight-story facility wide open to Soviet eyes and ears and a small annex where our diplomats can hide out physically but not electronically.

The cost of razing the entire chancery and constructing a new one using American materials and workers would be $64 million. Relatively speaking, that's a bargain. The alternative is the State Department's proposed cut-and-patch job, which -- including construction of the annex -- would cost up to $80 million. And that $80 million says nothing about the price we will potentially pay in compromised secrets and lost national security.

Bear in mind, too, that the new U.S. Embassy was constructed by the Soviets under contract -- a contract that called for delivery of a building ''free of defects.'' By sowing eavesdropping devices throughout the structure, the Soviets are in clear violation, yet the State Department frets that we will be accused of violating the contract if we pursue redress.

Of course, underlying all this bafflegab is State's fear that holding the Soviets to the contract would jeopardize the ''climate'' for an arms control deal. My response is twofold: If the Soviets refuse to respect our embassy construction agreement, how can we trust them to respect an arms treaty? Worse, if the State Department turns the other cheek to violations of the embassy agreement, why shouldn't the Soviets infer that they can also get away with flouting an arms agreement?

Schlesinger and State seem intent on papering over this dispute and accommodating the United States to a bug-ridden embassy complex. This is nonsense. It's like the exterminator telling you to coexist with your cockroaches.

If State lacks the grit to confront the Soviets over their gross violation of a bilateral agreement, then Congress must step in and do the job. The supplemental appropriations bill, signed by the president last month, forbids further obligations toward construction of the new Moscow embassy until November. Congress must now take the next step. We must require the State Department to raze the irretrievably compromised Moscow chancery and build a new embassy that is secure.

And by all means, let's send Mr. Gorbachev the bill.

The writer is a Democratic senator from South Carolina.