A roar of protest from farmers and their congressmen has slowed a plan to begin a kind of mutual fund that would invest in the nation's farmlands.

The plan developed by Continental Illinois Bank of Chicago, the nation's seventh largest bank, is to invest $50 million from tax-exempt pension funds and profit-sharing plans in buying about 50,000 acres of Mildwest and Southern farmland and lease it to formers. It would provide the huge pension funds diversification by investing in land rather than stocks.

Small farmers fear this would be a first step in a massive corporate land purchase that would push up the price of land to a level they couldn't afford and would either push them off the farm or back to the status of tenant sharecropper of Depression days.

Yesterday, at a hearing House Agriculture subcommittee members, most farm states, were strongly opposed and there wasa threat of legislation to bar corporate purchase of farmland if the bank does not abandon the plan.

Charles R. Hall, executive vice president of Continental Bank, told the subcommittee, that the bank will drop the plan if the Internal Revenue Service rules that income from the farmland investments would not be tax exempt.

He added that, even with IRS approval, "We feel it would still be premature for us to proceed at this time, for we want to consider carefully the views expressed by the committee and any thoughtful testimony of other witnesses."

Hall was accompanied by James L. Mooney, president of Merrill Lynch Hubbard Inc., a subsidiary of the nation's largest brokerage firm which would raise capital for the investment fund, which would be managed by the bank. Asked when the plan could get started, Mooney replied: "Not until the atmosphere is considerably more friendly than at present."

Secretary of Agriculture Bob Bergland has opposed the investment plan - called "Ag-Iand Fund I" - on grounds it would drive the price of farmland "so high we won't be able to eat."

Rep. Paul Findley (R-III,) testified yesterday that the plan should be opposed because tax exemption would give corporate owners an unfair advantage over small farmers, the fund with its large resources could outbid young farmers for land, would drive up farm prices, and could lead to concentration of control of the nation's food supply in the hands of a few bankers.

William B.Sayre, a vice president of Contentinental Bank, said he originated the idea three years ago as a way to help young farmers get started. Most of them don't have capital to buy land and would benefit from long-term leases, he said.

The bank officers said the plan contemplates giving renters operating control over the farms they lease and providing in the lease that a tenant may purchase his farm.Subcommittee members noted, however, that the draft proposal given them by the bank would give the trustees control over the farm - to the point of deciding what crops to plant - and viewed the arrangement as a long-term investment for the pension funds.

Bank officials said renters must have operating control of the farms because tax exemption could be obtained only if it were a "passive" investment.

Committee members didn't appear satisfied with the bank's statement of concern for the young small farmer.

"You'll be in direct competition with local farmers who want to buy more land," said Rep, Keith G. Sebelius (R-Kan.). "Why not use your money to make farm loans and forget about buying land?"

Rep. Charles E. Grassley (R-lowa) said the plan would introduce absentee ownership of the Farm Belt and a "castesystem" of lords and tenants.

Rep. Berkley Bedell (D-lowa) said it was "inconceivable" that Congress would sit by and let tax-exempt corporate investors be given unfair tax advantage over family farmers. Bedell said he would do everything he could, including pushing legislation, to thwart the corporate farm purchases.

The National Farmers Union opposed the plan as a first step backward toward sharecropping, Victor K. Ray, assistant to the president of NFU, said the nation's pension funds have enough money to buy one-quarter of the nation's farms.

Corporate investors would profit from inflated land prices, said Ray, but everyone else would lose. Farmers would lose needed land, states would lose Income taxes and consumers would pay more for food, he said.

Six states have enacted laws aimed at barring purchase or control of farmland by large corporate entities. The National Farmers Organization urged Congress to pass legislation extending this ban across the entire nation.

The subcommitte meets again Feb. 24 to hearadditional farm groups.