Mayors and bureaucrats call it UDAG, pronounced 'you-dag.' Formally, it is the urban development action grant program, and it is a safe bet that most Americans never have heard of it. But they have seen its results: some new downtown Hilton and Marriott hotels, public parking garages and civic centers, auto plants and warehouses and the new headquarters of the American Stock Exchange.

This is a story about the fight over UDAG, a dispatch from the urban front in the winter offensive of the Budget Wars of 1981.

If you are a critic, the program is a classic pork barrel -- an urban pork barrel.

If you are a booster, it is a marvelous incentive for business and government to work together to halt the march of industry from the declining cities of the industrial North to the suburbs and Sun Belt.

The man caught in the middle of the struggle in Samuel Pierce, President Reagan's secretary of housing and urban development. He is under pressure from administration budget-cutters to kill the program, and friends who have talked to him in recent days report that his instinct is to be a team player. But the cry of outrage from America's city halls is deafening.

Still learning about the array of federal housing programs in his sprawling agency and with only a deputy, two aides and a press secretary brought on board to help him, the former Park Avenue labor lawyer is faced with his first big decision: Should he allow UDAG to die without a fight, should he fight to keep it or should he attempt a compromise, salvaging the best elements of the program but perhaps packaging it in a different form?

The UDAG is a small-ticket item in Washington terms -- a $675 million line in the annual multi-billion-dollar federal housing appropriation. It was created four years ago by President Carter and was a sop to one of his loyal but clamorous constituencies, the big city Democratic mayors of the aging and troubled industrial North.

Basically, what the program does is to funnel federal dollars through city halls to the "Downtown Progress Clubs" of America to get them to stay in the inner city. The enticement has been in the form of loan subsidies with low and easy terms and, in many instances, outright grants.

There are few restrictions on who is eligible to apply. The money has gone for just about every kind of downtown and industrial development project imaginable: the new Hechinger Plaza shopping center on the edge of Capitol Hill in Washington, Baltimore's mammoth inner harbor revitalization, the towering Renaissance Center that looks out on the dead smokestacks of depression-ridden Detroit, the renovation of an old ferryboat into a floating restaurant docked in the Bridgeport, Conn., harbor.

Office of Management and Budget Director David A. Stockman pointed to UDAG early in his search for spending cuts, and unhesitatingly offered it as an example of waste in the federal budget when he was questioned during confirmation hearings by Sen. Carl Levin (D-Mich.), whose state has been one of the principal beneficiaries of the program. Detroit alone has received a total of $77 million in UDAG aid since the program began.

In Stockman's now-famous "black book," it is argued that the program creates no new private investment on a national level and in theory merely "compensates the private sector for shifting investments to high-cost or less economically efficient areas."

The mayors and UDAG's partisans in the bureaucracy say that the program has created thousands of jobs and been responsible for billions in spinoff development.But when Congress took a look at it a few years ago, it found some of those claims to be exaggerated. The clearest accomplishment of UDAG is that it has spurred some new building in shattered downtowns and provided a psychological lift for many gloomy inner cities. It has been a little like the color television set the welfare family boys; it doesn't do much to alter their basic condition, but it brightens up the living room and makes them feel better.

Big city lobbyists, seeing themselves mousetrapped, are going around town trying to sell UDAG as a "program with a Republican heart." Indeed, it is a program that plays in Peoria. Republican Mayor Richard Carver has used a $4.9 million grant to get Caterpillar tractor to build its worldwide training facility in that city.

It also is good for ailing General Motors, which is getting money from the program to rebuild and modernize outmoded assembly plants in Detroit and Baltimore.

The alarming question for the mayors is this: If UDAG is not sacred these days, what is?

The first bomb was dropped in the White House Cabinet Room last Tuesday. A dozen mayors were meeting with Pierce and White House advisors before a luncheon with Reagan. Mayor Tom Bradley of Los Angeles gingerly broached the subject that was uncomfortably on the minds of others.

Bradley said he had heard an unpleasant rumor, as those who were there later recalled it. He said he had picked up word around Washington that UDAG had been programmed for extinction.

Pierce said that it was true, but he offered the cold comfort of continuing some of the building projects the program has funded with the limited -- and in most cases already committed -- dollars from another HUD program chiefly aimed at funneling dollars to cities for neighborhood revitalization projects.

The confirmation of the rumor sent the mayors into a state of shock.

As the mayors left the Cabinet Room to go to the State Dining Room, John Gunther, executive director of the U.S. Conference of Mayors, who attended the first meeting but was not invited to the luncheon, told them: "You'd better get your businessmen to call Ed Meese."

Carver of Peoria sat besides presidential counselor Edwin Meese III at lunch, personally lobbying for the program. Those who were there remember Meese saying at the end of the lunch that he had been impressed by the strong feelings expressed by the mayors and soothing them by announcing that it would be fair now to call UDAG a "candidate for survival." In other words, it had been moved, at least temporarily, from the graveyard of federal programs to the intensive care unit.

In hindsight, urban lobbyists had the feeling of being outfoxed. They were so stunned by Pierce's news that they had forgotten to ask how bad the damage would be if the worst were to come to pass. Which committments already made would be honored? Would Detroit get the pending $30 million grant is was waiting for to hold the new GM assembly plant in the Motor City?

"[The mayors] were so flabbergasted that no one asked Pierce what cutting UDAG was going to mean," Gunther said wearily a few days later. "They spent their time arguing about the program."

In the bunkers of the urban lobbies around town and in city halls across the nation, there was a sea of rumors. Mayors called their congressmen and senators. Lobbyists called the career bureaucrats they knew and trusted in the middle ranks of HUD and OMB.

Pierce closeted himself in his new office at HUD, assessing the situation with all the method and secrecy of the head of a New York law firm's litigation section preparing to go to trial.

He refused all requests for interviews from reporters and, friends said last week, refused to take calls from mayors making special pleadings for pending UDAG projects.

One of Pierce's two aides directed lobbyists for the Conference of Mayors and the League of Cities to give him a report on how the regulations could be changed so that features of UDAG could be incorporated in the federal neighborhood revitalization program.

They said it could not be done.

The aide told them firmly, give him the report anyway.

To compound anxieties, businessmen with pending UDAG projects, apparently unable to get through to Pierce, are ringing the phones off the hook over at the Conference of Mayors.

"A lot of businessmen have been calling up and asking what in the hell do they do," an exasperated sounding Gunther said. "I say, 'Don't yell at me. Call Meese. We're not doing anything. It's them.'"

One effect of the Reagan administration's budget blitz has been to crack the always delicate alliance between mayor and governors. Back in December, they had stood shoulder-to-shoulder to lobby against cuts in federal revenue sharing aid to the states. Now it is far from clear that the governors will go out on a limb for the mayors in the effect to save UDAG. For one thing, it is a program that has circumvented the statehouses and gone directly to city halls. For another, the governors have their own worries -- potential cuts in the Medicaid program that they fund on a 50-50 basis with the federal government and possible reductions in welfare and highway aid.

Gov. Richard Thornburgh, Republican of Pennsylvania, came down to Washington last week to "look at the trial balloons that were going up."

"The reduction in dollars [for the states] can be at least partly offset by [loosening federal] regulation," he said, stressing that he was speaking only for himself. "Now's the time for all of us who have been preaching that to either put up or shut up. The cuts are inevitable. We know that."

Thornburgh indicated he was hoping that the states might get a greater role in the reorganization of federal housing programs, and talked of "slicing off some of those dollars to enable the states to act as balance wheels."

"Some of this looks like muscle-flexing on the part of the states," he said.

The states will have their day at the White House today when Thornburgh and the members of the executive committee of the National Governors' Association have their meeting with Reagan and top domestic advisers.