The Iranian government, in a major backdown from its ambitious economic expansion program, has announced that it will sharply curtail its massive program of industrial development costing more than $35 billion a year.

The announcement, made by newly appointed Premier Jamshid Amouzegar in a speech to Parliament Thursday, represents a significiant shift in priorities in Shah Mohammed Reza Pahlavi's plans to make the oil-rich nation one of the most advanced in the world by the end of the century.

The premier gave no reason for the move, but it was apparently tied to th inability of the economy to absorb the annual 20 per cent growth rate of recent years.

A diplomatic source in Washington said that he expects the rate to be slowed to about 7 per cent in the next five-year plan starting next year, adding that it was a case of Iran's "biting off more than it could chew."

There was no indication, however, that Iran plans to reduce significantly its massive $10 billion program of arms procurement, largely from the United States. Amouzegar emphasized that the purpose of this program "is to preserve th independence of the country and to create a suitable environment" for development.

The move announced by the premier involved a basic shift by Iran away from nationalized industry to the encouragement of private industry, although there is some question whether Iran's private business is strong enough economically to assume the task in heavy industry.

Earlier this month the shah called for a shift in the nation's economic priorities, which was taken in some diplomatic quarters as an indication that the country had made serious mistakes in its economic planning.

"The shah never admits to being embarrassed," a Washington source said, but it was seen as an admission that the economy is in serious difficulties.

The economic moves Thursday came amid indications that the new government has embarked on liberalization in some other areas.

he shah announced Wednesday and Thursday the release of 500 prisoners convicted by military tribunals of activities "against the security of the state."

This has generally been interpreted to mean political prisoners, although in the past there have been indications that some of those released earlier this year.

Equally significant, the press was allowed for the first time to report the release - the first time the media have reported that there are anti-state prisoners in the country.

The customary stringent control over the media also appears to have been eased somewhat with the naming of former newspaper editor Darius Homayoun as minister of information in the new government.

Special correspondent Bryan Brumley reported that editors say they are no longer subjected to constant "advice" on what to print.

Brumley also said that there is less of the traditionally fulsome coverage of the activities of the royal family and the journalists have even been allowed to criticize the former policies, although moderately.

In Thursday's speech Amouzegar, who replaced Amir Abbas Hoveyda as premier earlier this month, said the government will stop expansion of the state's economic activities and "leave the people's work to the people."

In the last three years the government has allocated more than $110 billion toward economic development, mainly for heavy industry. Amouzegar's announcement apparently means that most of this expenditure will be shifted to such fields as transportation, power, health, education and a new area - low-cost housing.

Special Correspondent Bryan Brumley reported from Tehran that it was understood that the government plans understood that the government plans to leave to private industry the development of steel mills, copper mining and the petrochemical industry wherever possible, although nationalized projects under construction will be continued.

For example, the government has announced that it will sell to private business the National Petrochemcial Corp. of Iran. Its assets are estimated to exceed $4 billion. The government also fears to encourage private investment in road-building and agricultural development.

There have been hints for several months that Iran was planning to slow its growth rate, but Amouzegar's speech to Parliament was the first explicit statement of such plans.

When the shah installed Amouzegar as premier Aug. 7, he called for a slower economic growths rate, saying: "There are reasons why we should not pursue the task of development in the manner of the past. In the area of economic growth, we are the front-runner, but we must refrain from expecting to stage a rerun of this development performance, this leap which has been unparalled in the world."

The most visible imbalance is the shortage of electrical generating facilities.Iranian industrial and urban areas have been blacked out for between two and six hours daily since June, and industry is operating at 50 per cent capacity or below.

Reliance on foreign technology, and the need to import large quantities of equipment and technicians to run it is another major impediment to Iranian plans. The government has also hoped that private capital would move into manufacturing to provide a market for its own baisc industries and meet soaring domestic demands, which fueled the inflation that is now running at about 25 per cent a year.