The federal Economic Development Administration, ending its 10-year dream of creating a showcase for federal aid to minority development, sold Harambee House to Howard University yesterday for $1.3 million.

In doing so, the federal agency -- itself a target for extinction by the Reagan administration -- stepped aside from a venture it had long fostered through grants and debt-forgiveness and handholding.

Plans for the hotel began in a different era with the original loan approved in 1971. The hotel opened with great fanfare in 1978, but fell into financial disarray a year later and has limpted along ever since. It was to be the largest back-owned hotel in the nation, a first-class operation designed to revitalize a down-at-the-heels part of the city.

The university will rename the hotel The Howard Inn and plans to establish a hotel administration program within its school of business and public administration in connection with the hotel. District officials predict hotesl will be a growing industry in the city.

"We just felt it was time for the government to make a clean break with Harambee House," said Harold W. Williams, acting assistant secretary for economic development in the Commerce Department. Williams said EDA is satisfied that it is making the break under circumstances that asssure that the original objectives of the project will be carried out.

"It's still a minority enterprise and will still serve the interests of that area," Williams said.

He estimated that EDA had either spent or written off bad debts totaling at least $10 million.

As recently as five months ago, EDA agreed to provide $608,600 to clean up a Georgia Avenue junkyard that had become famous as part of the view from Harambee House in a renewed effort by EDA and the District government to make the hotel prosper. But that was when Jimmy Carter was president and the federal administration was sympathetic to such projects.

Plans at the time called for the District of Columbia Development Corp. to acquire the hotel with a moratorium on principal and interest payments on the unpaid balance of $4.3 million still owed on the property (which had been acquired by EDA) until the hotel could be sold to a private developer.

Those plans were "overcome by events," Williams said. "We took another look at the project and decided the best thing to do is sell it for cash."

The Reagan administration has proposed the elimination of EDA in the budget it sent Congress yesterday. EDA has had a number of controversial loans and loan guarantees, which the administration has criticized. Negotiations to sell Harambee House began in early February, shortly after Reagan took office, an EDA spokesman said yesterday.

The transfer makes good sense from the university's point of view, a Howard official said yesterday. The school surrounds the hotel, with the upper campus to the north of the hotel and the school of medicine to the south.

The university will continue a contract with American Hotel Management, a firm retained by EDA that has been managing the hotel. As time goes by, its own trainees will move into management of the hotel.

We would envision that the university would make extensive use of the hotel for its many hotel needs," said Roger Estep, vice president for development and university relations. The university regularly has visitors for such functions as seminars and basketball games who might want to stay near the school.

Estep said Howard plans no major changes in the 160-room hotel and will continue efforts such as an attempt to get a Metro stop nearer the university that would benefit both the school and the hotel.

Harambee House was the brainchild of supper club operator Ed Murphy, who named it with the Swahili word for "utility." It suffered from construction obstacles, management problems and inadequate funds to pay bills. The relationship between Murphy and EDA fell apart in charges and countercharges about whom to blame.

EDA ultimately took over the property with $4.3 million still owed and terminated a lease with the Murphy Hotel Co., which was in default on a $2.9 million debt. All legal obstacles to the transfer of the hotel to Howard have been cleared, Williams said yesterday. CAPTION:

Picture, Harambee House will become The Howard Inn and will be operated as part of new hotel administration program at the university. By Craig Herndon -- The Washington Post