Alan Baron, the owner and editor of a widely respected Washington political newsletter and a long-time liberal activist in the Democratic Party, has been arrested on a charge of possessing cocaine with the intent to distribute it.

Baron, 36, was arrested in a raid on his Capitol Hill home Friday following a two-day undercover investigation by District of Columbia police.

Baron owns the Baron Report, a monthly newsletter that is considered essential reading by both liberals and conservatives in Washington and is widely respected for its insights into national Democratic party politics.

In a brief statement last night, Baron told a reporter: "I categorically deny ever having distributed cocaine." He declined further comment.

According to U.S. District Court documents, Baron and one other man were arrested after a police informant told detectives that he had witnessed the use and sale of cocaine in Baron's home at 710 G St. SE during a two-day period early last week. A search warrant for the home was obtained shortly afterward.

Sources close to the investigation said that police officers executing the warrant confiscated a brown vial containing half a gram of cocaine from Baron's pants pocket.

An additional small amount of cocaine found in a Chapstick tube was confiscated from Ira S. Goldstein, 30, a self-employed electronics engineer who is a tenant at Baron's house, the sources said. Goldstein also was charged with possessing cocaine with intent to distribute it.

Police estimated the total value of the cocaine seized at about $350.

In addition, the sources said, police confiscated $2,100 in cash from Goldstein's bedroom along with several items of so-called "narcotics paraphernalia," including gram weight scales, small glass vials and miniature funnels.

Kenneth Stroup, Baron's attorney, was critical last night of the charge of distributing cocaine. "I believe we will exonerate him. In an ordinary circumstance it would be treated as a minor infraction," Stroup said of the small amount of cocaine seized. "The charge would not have been brought in federal court . . . They [police] are playing off Alan's celebrity status."

Close friends of Baron said he was shocked at the severity of the charge and worried about its effect on his newsletter which is sent to about 2,000 political and union leaders around the country.

After their arrest on Friday, Baron and Goldstein were released on personal recognizance and appeared in an arraignment proceeding Monday before U.S. Magistrate Henry H. Kennedy Jr. A preliminary hearing in the case is scheduled for Aug. 31.

Baron was executive secretary of the Democratic National Committee during 1972 when Sen. George McGovern was the party's presidential nominee and titular head of the party. Baron left that job at the end of the year when Robert Strauss, now President Carter's special Middle East envoy, took over as party chairman.

Baron, a highly regarded political strategist, has held a variety of jobs in liberal Democratic politics, including the presidential campaigns of McGovern and Rep. Morris Udall (D.-Ariz.). "He [Baron] just started putting on paper and selling what he had given away free," one friend said last night.

The Baron Report, which has been published monthly since 1976, is not connected with Barron's Business and Financial Weekly, which is owned by Dow-Jones Inc.

Cocaine is a stimulant drug that has taken on an air of status in recent years, but side effects of its use can be serious. These effects can include anxiety, delusions, insomnia and even death in extreme cases of overuse, experts in the narcotics field say.

An ounce of cocaine currently sells for from $1,600 to $2,400, investigators report. The drug normally is inhaled through the nose, and its purity on the streets ranges around 50 percent.

Inhalation of cocaine produces a mildly euphoric "high" that lasts for about 20 minutes.