In an unusual challenge to church authority, the Notre Dame-based Catholic Committee on Urban Ministry has appealed to the National Conference of Catholic Bishops to rescind its decision to terminate next year the noted activist priest, Msgr. George Higgins.

The decision to dismiss Higgins a year before his scheduled retirement was made as a budget-balancing measure, Church spokesmen said.

Higgins, who has served the hierarchy for 33 years, for many years headed the social action division of the old National Catholic Welfare Conference, predecessor of the NCCB.

For the past six years, he has occupied a post created specifically for him in which he has had "complete freedom," he told a reporter, "to do just about anything I wanted to do." In addition, he writes a weekly column for Catholic newspapers on social justice issues.

Calling Higgins "the most visible sign of the church's concern for justice in the work place" and "the church's ambassador to the labor movement," the urban ministry group, which met this week at Notre Dame, sharply challenged Higgins's termination. In a letter, the group's executive board requested a meeting with Bishop Thomas C. Kelly, NCCB general secretary, to protest the decision.

The urban ministry group is a loosely structured organization of priests, sisters and lay persons involved in social ministry efforts of the Catholic Church throughout the country.

In their letter, the CCUM board questioned the explanation of the Higgins termination. "Given the many stands of the U.S. bishops on organized labor and human rights, it is incredible that the action be explained by financial considerations," the letter said.

"A fuller and more credible explanation must be given to still the outcry of all those concerned with justice in the work place," it continued. "If the dismissal was only a question of money, then that type of budget decision shows appalling lack of values and sense of priorities."

The letter expressed concern that Higgins' dismissal had been "widely perceived as a retreat from the traditional social justice position" of the Catholic Church in this country. Kelly denied that the action was motivated by anything but budgetary considerations.

A spokesman for the bishops said there had been "some reaction" from around the country to Higgins' dismissal, news of which leaked to the press two weeks ago. The NCCB had announced earlier other elements of its belt-tightening, which included the closing of its two-person Secretariat for Human Values, which functioned as a liaison with the scientific community.