A plan to set up a sort of mutual fund to buy up American farmland has been dropped because of furious opposition from farmers and their congressmen.

Continental Illinois National Bank of Illinois, one of the nation's largest banks, had announced plans to invest $50 million in pension funds in buying up Midwestern and Southern farmland if the fund called "Ag-Land Trust 1" were granted tax-exempt status. The bank would have rented out the land to farmers to operate.

At House hearings last month, bank officials said they were trying to meet the need of young farmers for capital. But farm interests protested that this could be the fist step in wiping out the family farm because young farmers couldn't compete with corporate investors to buy land, and placing control of the natitn's food production in the hands of a few banks.

Yesterday at a meeting with Secretary of Agriculture Bob Bergland who strongly opposed the plan, and attended by Reps. Richard M. Nolan (D-Minn.) and Paul Findley (R-I11.), leading congressional opponents, the bank's president, John Perkins, announced the land purchase plan was being dropped. He said the application to the Internal Revenue Service for tax exemption had been with drawn and the plan abandoned after discussing it with farmers, business men and government officials.

Nolan, chairman of the House Agriculture subcommittee that held hearings, said abandonment of this one plan was just a "drop in the bucket in terms of what must be done to save our threatened family farm system." Nolan said his subcommittee will "vigoriously pursue the issue of corporate land ownership . . .to assure that there will be no more Ag-Land trusts." If legislation is needed to protect the family farm, his subcommittee will recommend it, Nolan said.

But Findley said he felt the decision of Continental, a leader in farm management and financing should lay to rest the issue of financial institutions investing in farm land.

"The reaction Continental encountered from the formidable array of critics," said Finley, "will deter other banks with less experience in farm management from embarking upon a similar enterprise."