A major battle has erupted within the Carter administration over a proposal that virtually all federal housing subsidy programs be scrapped to provide money for welfare reform.

The Office of Management and Budget has suggested that the level of new subsidized housing commitments be cut from 400,000 to 50,000 units a year. That reduction in starts plus cut-backs in ongoing programs could divert most of the $4.9 billion the Department of Housing and Urban Development currently spends in this area to help pay for the improved federal welfare program President Carter has promised to send Congress next month.

Patricia Roberts Harris, HUD secretary, met yesterday with presidential assistant Hamilton Jordan and reportedly lodged a vigorous protest against the proposal.

Harris declined to discuss the matter with a reporter, but sources said HUD officials believe that the scrapping of the housing programs would mean the end of neighborhood revitalization efforts in thousands of small towns and big cities.

The sources said HUD officials also believe that OMB's approach would be inflationary, because giving poor people money to search for their own housing would drive up housing prices.

HUD officials do not believe, the sources said, OMB's argument that housing deprivation is caused by inadequate income, rather than by the housing industry's inability to produce enough housing, and can be overcome by raising incomes for the housing poor."

One reliable source said Health, Education and Welfare Secretary Joseph A. Califano Jr. discussed the matter with Harris, and told her he is 100 per cent behind OMB's position.

Califano's press secretary said the HEW chief had no comment because "it's an OMB matter." But it is no secret that Califano has been scouring the federal government for other programs that could be "cashed in" to meet the higher costs of a national welfare payment while still obeying Carter's injunction against additional federal spending.

The OMB memo says that "for planning purposes, HEW is assuming at a minimum," that it can add to present welfare outlays the funds now being used for food stamps in the Agriculture Department, the work-incentive program in the Labor Department and counter-cyclical jobs aid to the cities.

If the OMB suggestion on housing were adopted, it would shift more than half the current expenditures of HUD into the welfare-reform account.

The OMB memo, distributed last Thursday, gives three alternative policies for fitting housing programs to the new welfare reform program, including one which would leave existing HUD programs untouched.

But the final option, which has stirred the controversy, calls for deducting housing subsidies from the welfare payments of families receiving special housing benefits, and slashing future housing commitments from 400,000 units a year to 50,000 units!

An OMB official said the document "really just asks questions and is not a firm position of this agency." But HUD official and those few outsiders aware of the OMB memo are treating it as a major threat to the federal housing program.

The OMB memo criticizes the existing housing programs on the grounds of cost, efficiency and equity, noting that only out of every 13 families below the poverty line currently receives any benefits from HUD subsidies.

It questions whether public subsidies add significantly to the overall housing stock and says that "most [low-income] families can obtain decent housing for less than it costs the government to obtain it on their behalf."

The OMB memo concedes that scrapping the housing programs would "significantly" reduce the benefits for those insubsidized housing, but transferring the savings to welfare revision would "be far more equitable and would leave the great majority of proverty-level households better off as a result."

HUD officials have argued in the past that housing subsidy programs prevent neighborhood deterioration and promote integration and concern for the environment, because of the restrictions placed on use of the money. There would be no such pressures operating if, as OMB's third alternative suggests, housing program money were given out in cash in the form of increased welfare benefits.