In the hills of southern Indiana, the federal government is spending $700,000 in tax money to build a 96-foot-high version of the Egyptian pyramid of Cheops and an 850-foot-long replica of the Great Wall of China.

This would-be tourist attraction is the gift of the Economic Development Administration EDA , a Great Society program that was designed to provide a financial boost to depressed areas but is now under attack by Reagan administration budget cutters.

The project is also the dream of one man, Merle Edington, the garrulous 64-year-old head of the local Chamber of Commmerce who for a decade has wanted a memorial to a dying limestone industry that provided the stones for the Empire State Building as well as the Pentagon, National Archives and many other federal buildings in the nation's capital.

"The only thing we sent to Washington more than limestone is money," Edington said recently. "Now I got some clowns yelling at me because I want some of it back."

He spoke over lunch with the boys at the American Legion Hall here, where food and drinks for three cost $7.75. When Edington ordered "the usual," the waitress brought him a double scotch, two beers and a sirloin sandwich.

"We're creating something here," he said. "Politicians don't create anything."

Edington was aiming his tart words mostly at Sen. William Proxmire (D-Wis.), who earlier this month handed the EDA his Golden Fleece Award for approving grants for the project.

But Edington also has local critics -- they call him "the Pharaoh" -- who say not only that the project seems a waste of tax money but that they doubt that the pyramid and the great wall can be completed for $700,000. They also are skeptical of Edington's prediction that the project will be finished by the end of 1982.

A number of people interviewed in this largely stagnant town of 16,000, many of them staunch supporters of President Reagan, say they have no sympathy for the pyramid project, even though it is supposed be a shrine to the $15-million-a-year Indiana limestone industry that in the building would create at least 40 jobs and draw a million tourists. Instead they view it as one more example of the excessive largesse that Washington has handed out over the years.

"I'm afraid of what is going to happen to my country with all this government spending," says Dave Elliott, who owns a stone mill here and has donated 12-ton blocks of scrap stone to help build the pyramid and wall. "The government is going to go down the drain if we don't cut back." Although he wishes Edington well, Elliott says he thinks it will take millions of dollars and years of work make the project something that people will pay to see.

"The limestone industry should have done something like this years ago," Elliott said, but now that many developers have turned to cheaper building materials, the depressed industry cannot afford it.

Despite the fact that some Reaganites here are philosophically opposed to the type of federal grant that is paying for the pyramid project, Edington and his supporters say they are not about to return the money.

"I pay a lot of taxes myself," says William Hubbard, the 63-year-old owner of a television store and a chamber board member. "How else do we get some of our dollars back? We might as well get our nose in the trough."

EDA officials, who now concede the project is a "long shot" that has always been vulnerable to public ridicule, say the potential boon to Bedford community justified the approval of $500,000 for the pyramid in 1979 and another $200,000 for the Great Wall earlier this year.

"We were unsure how successful it would be in the public eye," said Edward Jeep, EDA's Midwest regional director in Chicago. "But it gave promise of bringing some economic development to a very poor part of Indiana, which was our mission."

Jeep said EDA knew the project was risky -- in part because there hasn't been much recent experience in building a pyramid or great wall, so project costs were difficult to estimate.

All the same, "because of the level of poverty that exists there, we felt it was worth the risk at the time," Jeep said.

When the original grant was approved in March 1979, 8.4 percent of the workforce in surrounding Lawrence County was unemployed, 2 percent higher than the national average. The Lawrence County rate is now 11.5 percent, compared to the national figure of 7.5 percent.

"I thought it was an outrageous waste of money," Proxmire said in an interview this week. "Fresh in my memory is that we just decided to cut money for poor children, health programs and essential programs and now we come along and find we are putting out money to promote a private industry and there's no way you can justify that kind of priority."

Proxmire said that EDA's eligibility requirements are so "ridiculous" that the agency is ineffective and should be abolished. Reagan budget cutters have earmarked EDA for extinction, but House-Senate conferees last summer kept it alive on as reduced scale.

Many of the pyramid's supporters, led by Edington, say it is unfair to compare their development to programs that are currently being slashed since the original plan was approved by EDA before Reagan took office.

"The limestone industry is struggling for its existence," says Dr. George Kneisel, a Bedford chiropractor and chairman of the Chamber board the last two years. "There was no way we could do it short of federal funds."

And there was no way they could do it without Merle Edington, a man who could "sell iceboxes to Eskimos," according to Elliott. Edington also is a man who, Kneisel says, "has all the finesse of a slop in the puss with a manure shovel."

Edington, a man who resembles former Ohio State football coach Woody Hayes both in portly appearance and blustery temperament, said he initially envisioned a tourist park showing the development of the limestone industry, and added the pyramid because people are naturally curious about such structures.

"Give a 2-year-old kid a stack of blocks and the first thing he'll do is build a pyramid," Edington likes to tell skeptics. "A thousand years from now if someone wants to find out how they built the Empire State Building, you can come out here."

He said he decided to use leftover rock from the pyramid for another structure, and settled on a segment of the Great Wall when he learned that it was the only man-made structure astronauts could see from space.

The pyramid and great wall, construction of which has just begun, is being built north of Bedford on a 20-acre field in an unincorporated neighborhood appropriately named Needmore. When it is done, Edington says visitors will be able to stand atop the pyramid and see the "Empire hole" where the stone was cut for the New York City landmark. There will be tours to the quarries and a museum with photographs, a slide show and memorabilia from the history of the limestone industry.

Edington said he has not yet figured out how people will get to the top of the pyramid. "If we have a couple more warm winters, I think I'll get a ski lift cheap," he mused.

Asked when all this will be done, Edington snapped, "How many inches of snow will I get on Dec. 27? We're not building Hardee's." He said he has already lost 60 days to bad weather this year and doesn't want to be pinned down on a completion date.

Edington said that 46 percent of the project is complete and 37 percent of the government grant is spent. However, he is still struggling with the foundation of the pyramid, and construction of the Great Wall has barely begun.

Still unanswered is how people will find their way to the pyramid if it is ever finished. Visitors to the site now have to meander through Needmore on a country road that dead ends at the field.

Edington, however, says he is not worried. "If we bring a million people a year in here, someone will do something about it," he said. He also said that, when the project is completed, private developers will see the need to construct more motels, restaurants and other facilities in the community.

Edington says the number of visitors and the cost of the project were estimates from consultants he hired. EDA's Jeep concurred, saying that the government agency accepted Edington's figures with a simple review "to see if the figures seemed way out of whack."

But Edington's engineer, Warren T. Hobson of Indianapolis, said, "At the rate of progress he's making it will take four years. My personal view is that he's going to run out of funds after two years."

"It's going to cost at least $1 million," Hobson said. However, the engineer suggested that if at least 30 feet of the pyramid is completed Edington could charge admission to visitors and use the revenue to continue construction.

Edington said that, to save money, he is the general contractor for the project, even though he has no experience in that role or in building with stone. "We're going to have a botanical gardens down there," he says with a sweeping gesture toward a wooded area. "And when the wall is finished, people will be able to drive their cars on it."

Edington said he will finish the project with the money at hand by making tradeoffs in original construction plans, such as dropping an administration building and underground utilities in order to finish the 25-foot-high Great Wall.

Edington has some experience in procuring state and federal grants, having previously obtained $633,000 from EDA for an industrial park in Bedford. It now has only one tenant because, he says, "the interest rates are so high."

Nevertheless, he professes no concern over spending federal money for the project.

"It meets all the requirements that some welfare mother with six bastard children uses to get welfare," he said. "When it's done, there's not going to be anything like it in the history of the world."