Montgomery County Police Chief Robert J. diGrazia said Saturday that his administration has been virtually paralyzed by his efforts to clear himself of allegations - now before a county grand jury - that he had mismanaged his department.

At the same time the heads of the Fraternal Order of Police, the Police Association and other police officials said the current controversy has created an atmosphere of confusion, suspicion and insecurity. "The guys are not going out of their way to do a damn thing," said Leonard Simpson, head of the 500-member Fraternal Order of Police.

DiGrazia said in an interview he is spending "less than 20 percent" of his time on police and county government work since an organization called Code 3 began complaining about his management of the department. Code 3 is headed by Margaret Jacocks, the wife of a police sergeant. Its name is police terminology for "a serious crime in progress."

The long-simmering controversy over diGrazia's handling of police affairs peaked last week when a county grand jury was granted an extended term in order to investigate the Code 3 allegations.

Blaming his problems on Jacocks and a "minority" of disgrantled officers who he says are opposed to change and want to "break" him, diGrazia said, "I'm either responding to press inquiries (about the Code 3 charges) or writing reams of reports on the allegations . . . I just haven't got time to devote to the administration of the police department."

He estimated that the department has spent about $30,000 in manpower hours trying to respond to Code 3.

But the chief said, "I'm just too stubborn to give in to their [his critics"] penny-ante actions . . . I stand on my record of 15 years as a police administrator."

DiGrazia came to Montgomery County in November 1976 amidst much fanfare and with a national reputation as a tough but progressive cop. He had introduced reforms in both the St. Louis County Police Department and the Boston Police Department, which he had headed before accepting the $50,000-a-year position in Montgomery County.

DiGrazia vowed then that he meant to settle in Montgomery because he was tired of moving around and because the highly educated, highly skilled Montgomery force was ripe ground for implementing new police policies and procedures.

Indeed, he seemed to be putting down roots in the county. He divorced his first wife shortly after he arrived in Montgomery, then remarried here. One of his teen-age daughters agreed to live with him in Montgomery County on the condition that the family would remain here.

But controversy began brewing soon after he arrived. He said the department was top-heavy and eliminated one position on major and put more sergeants and corporals out on the street. He eliminated the procedure for granting promotions and said he would implement a new one that would reduce the risk of cheating and better ensure that the officers could perform in the job they were applying for.

He began requiring more training for the department's higher-ranking officers.

But the problem according to several officers, has been that diGrazia has been slow in achieving many of his promises, and has failed to adequately communicate to the officers the value of his program and policy changes.

"Most of the officers want to change but they don't want to change for change's sake," Simpson said. "They want explanation and the ones they have gotten are either not logical or not acceptable. There's skepticism and cynicism in the whole department."

DiGrazia now acknowledges that he may have erred in demanding too much too soon from his officers. Under his administration, he said officers "have been given the opportunity to make comments and suggestions . . . have input into general orders."

Before, he said, "(the officers) were like children (who) should be seen and not heard."

"We would like to think," diGrazia said, "that relatively speaking, we have a modern, intelligent group (of officers)." But, he added, "Unfortunately . . . they've been held down too long."

DiGrazia maintained that he has done nothing illegal but that Code 3's allegations and his problems with some of the officers stem from a philosophical dispute over his methods.

Code 3 has charged that he needlessly hired outside consultants to evaluate certain divisions of the department and help him establish new programs.

It also has charged that the police department violated county procedures in granting some nonbid contracts.

So far, the FBI, the Governor's Commission on Law Enforcement and the Administration of Justice, the Law Enforcement Assistance Administration and the county's auditing department have looked into Code 3's allegations of mismanagement and the police department and have found no criminal violations.

However, one County Council staff auditor found that the police department's response to some of the Code 3 allegations was "too vague" and requested further information.