Maryland Attorney General Francis (Bill) Burch yesterday withdrew as a candidate for governor of Maryland, acknowledging that the public has never forgiven him for his controversial plea bargain agreement with Pallottine priest Guido John Carcich.

Burch's withdrawal narrowed the once-crowded Democratic field to two leading candidates, Acting Gov. Blair Lee III and Baltimore County Executive Theodore G. Venetoulis.

"It's an issue that continues to simmer," Burch said of the May agreement that gave Carcich probation in return for a guilty plea to charges he mishandled more than $2 million donated for the poor. "I believe that was the reason for my falling in the polls," he said.

He has heard about the Carcich sentence, he said, "from people who say they'd help me raise money. The say when they talk to people around the state, they don't like the Pallottine decision. It makes them feel uncomfortable."

Burch, 59, a conservative Democrat with support among blue-collar and Catholic voters, was considered a longshot prospect in the September primary. His candidacy was taken seriously, however, because of his state-wide exposure as a three-term attorney general and his populist campaign theme.

In recently published newspaper polls, Lee has held a comfortable lead. Venetoulis is his closest competitor, followed by two district longshots - former Maryland Transportation Secretary Harry R. Hughes and Baltimore City Council President Walter S. Orlinsky.

After Burch's surprise announcement yesterday - the last day for withdrawal from state races - it was impossible to predict whose aandidacy would benefit most from his action. Key campaign strategists for Lee and Venetouils said the development had narrowed the contest to two men, but each interpreted the move as a plus for his candidate.

"There's no question in my mind that Blair will be the beneficiary," said Frank A. DeFilippo, Lee's media adviser. "A lot of Burch's supporters in the business community, the Catholic contractors, are going to feel more comfortable with Blair than Venetoulis or Hughes."

Jackie Smelkinson, Venetoulis' campaign manager, said Burch's withdrawal benefits her candidate by clarifying the race. "I think we can convince the voters they have a clear choice now between (Lee's) politics as usual and (Venetoulis') new Maryland," she said.

The attorney general's withdrawal, Smelkinson said, should increase the number of undecided voters, already as high as 40 per cent in a recent newspaper poll. "Those 40 per cent know Blair Lee and they don't like him." she said. "They don't know Ted Venetoulis yet."

Surrounded by three of his sons and a dozen campaign aides, Burch opened his news conference with a symbolic gesture. "I guess the best thing for me to do is take my button off," he said, laying the metal object on a table. "It says 'Bill Burch for governor.'"

Burch said he agonized over his decision for the past week and sought the counsel of several political experts, including former governor J. Millard Tawes. In recent days, he said, he has despaired over the difficulty of raising money and his fall in published polls.

"I came up with the decision that one must face reality," said Burch, a suntanned man with a mane of pure white hair. "I said to myself, 'Bill Burch, it's not in the cards for you to be the governor of the state.' The facts of life are, I can't win."

Burch said he has not decided whom to support in this fall's primary. Nor has he made plans for his own political future after serving the past 12 years as Maryland's chief law enforcer. Before his first election as attorney general in 1966, he was state insurance commissioner.

The sad, disappointed tone underlying his remarks yesterday was in sharp contrast to Burch's buoyant, almost cocky manner in the early days of his campaign, more than a year ago, when he invited scores of potential contributors to his home for cocktails and a campaign speech.

His strategy at the time was to raise enough campaign money to dry up the political capital in Maryland and scare off potential competitors. It was a technique refined by suspended Gov. Marvin Mandel when he ran for election in 1970 and 1974.

Burch raised more than $300,000 at a large fund-raiser last May in Baltimore's Civic Center, where moving pictures of the attorney general flashed across screens hanging from the high ceilings and a tape-recording blared his campaign song, "Bill Burch, a man who cares."

The affair failed to intimidate his opposition and generated embarrassing news stories a few days before the event, disclosing how the attorney general asked Baltimore's police chief and numerous members of state regulatory bodies to sell tickets.

Burch campaign strategy changed several times after the early fund-raising days. When he formally announced his candidacy in April, he stressed his record "as an attorney general who fought for the little people." He would do the same as governor, he promised.

Then, two months ago, he emerged in his role as a "conservative populist," an angry man ready to take on political bosses who make deals for promises of patronage, school teachers who show more interest in their paychecks than their pupils, and unproductive state bureaucrats.

Burch added a touch of levity to the campaign by petitioning the court to have his name legally changed to include his nickname, Bill, which he preferred enclosed in parentheses. Last week, he sued a state elections official who would not provide the parentheses on the ballot.

But Burch could never offset the public's anger over the Pallottine case, he said yesterday. In a private poll he recently had commissioned, he said, nearly seven of 10 persons canvassed either believed that the plea bargain disqualified him to be governor or had no opinion on the matter.

"The Pallottine thing had an adverse reaction," he acknowledged at the news conference. "It wasn't going away. I'm glad I did it. It was the right thing to do. I bit the bullet and took the consequences. But I can understand how some people are uncomfortable."