From the front, the faded brick building on the corner shows the years of neglect, its boarded-up windows blending with the rundown houses and taverns that line the decaying downtown street.

But in the back, a dozen workers in hard hats are pouring concrete, tearing out exposed wires and laying the foundation for a modern facade. When they are done, the four-story building will be transformed into a new headquarters for the Jamison Door Co. and 20 one-bedroom apartments for low-income senior citizens.

The building is one of dozens of renovation and construction projects, financed largely by the federal government, that brighten the landscape of this struggling industrial town at the foot of the Appalachian Mountains. But the flow of federal dollars that has fueled this measure of revitalization is slowing to a trickle, and officials here are wondering how they are going to pay for such capital improvements in the future.

Still, not everybody in this Western Maryland town of 34,000 accepts the view that endless federal aid is necessarily a good thing. For years, officials here have paid for these projects with government grants while preaching the doctrine of self-reliance. But many now say the programs need to be pruned, that they have strangled the town with too many costly regulations while squeezing out private investment.

The outlines of the Reagan budget cuts are coming into sharp focus in dozens of places such as Hagerstown as officials wrestle with the impact on projects ranging from public housing and mass transit to public works construction. The impact of the Reagan budget squeeze is particularly sharp in many cities where local governments have come to rely more and more on federal funds to pay for public works projects. Story, Page A6.

As Barry Teach, the Washington County administrator, put it: "No community this size can afford $22 million in sewer plant improvements, even if we borrow the money." Referring to a massive project being financed here with money from the Environmental Protection Agency, he said, "The only way these things are affordable is with some kind of federal assistance."

Hagerstown is a cramped, gritty, blue-collar town with a 1950s atmosphere; a town where one of the four remaining movie theaters still is showing "The Sound of Music." Its hilly streets are lined with glass companies and printing firms, pool halls and pizza places, soot-covered row houses and half-empty hotels.It also is a town where most of the workers build trucks and airplanes and are accustomed to going without a paycheck when the production lines slow down.

With the federal dollars rapidly dwindling, the town's officials are looking for new ways to pay for roads and street lights and sewer lines. They are struggling to develop new industrial sites at a time when local manufacturers have laid off thousands of workers. And they are trying to renovate the ailing business district to keep still more merchants from bailing out.

A short drive around town shows that the signs of federal involvement are everywhere:

In the downtown shopping district, whole blocks have been repaved, new street lights installed and trees planted with money from the Department of Housing and Urban Development and the Appalachian Regional Commission. The county health department has new headquarters with modern medical clinics, courtesy of the ARC. City Hall has been insulated through the Economic Development Administration. The Maryland Theater, which survived the vaudeville era only to be gutted by fire, has been restored with the hammers and nails of workers hired under the Comprehensive Employment and Training Act.

Behind a wire fence down the road, a shiny new fleet of nine white buses has just been delivered by the Urban Mass Transit Administration. At Hagerstown Junior College, students are rehearsing a play in the new million-dollar auditorium built by the ARC.

The owner of the Jamison building began his renovation only after HUD promised to contribute $353,000 and to pay most of the rent for the elderly tenants. The ARC, a Great Society program aimed at helping depressed areas in 13 states, agreed to provide an additional $40,000.

But times are changing, as the commissioners of Washington County learned one recent morning when they made the 70-mile drive west to Cumberland for an Appalachian commission meeting.

"Up until now, there was never a good project that wasn't funded," said Martin Snook, president of the county commissioners. "If you went to the ARC, you knew you'd be coming back with some money. Now you just come back with a sandwich."

For Snook and other critics, this is not a totally negative development. They say the town often uses federal grants for useless projects simply because the money is available. For example, Snook said that Hagerstown is spending federal money to renovate an old barn into a new headquarters for the water pollution department, even though it is costing twice as much as it would to build a new office.

"The federal government--that's the only reason we're doing it," the 46-year-old commissioner said with a frown. "Nobody in their right mind would spend that kind of money if they had to pay for it themselves."

Voters here, who went decisively for Ronald Reagan, did not seem especially upset about the cutbacks, based on informal interviews around town. While unemployment is above 9 percent and climbing, most of the area still appears to be Reagan country.

The planners and politicians, whatever their ideology, are plainly worried. Two years ago, county officials used grants from the EDA and the ARC to install new roads and water and sewer lines at Interstate Industrial Park, which helped lure such firms as Canteen Corp., Rust-Oleum, Montgomery Ward, CertainTeed Corp., Georgia Pacific and Sun Chemical Co.

Now, however, it's not so easy. County officials are determined to build a new industrial park on a nearby 140-acre cornfield, strategically located at the crossroads of Rtes. 70 and 81 and a Conrail freight line. But they need at least $500,000 for new roads and utility lines, and although EDA likes the proposal, prospects for funding are dim.

"Our economy is heavily tied to manufacturing, and you have to have good support systems--water, sewer and transportation--to attract and retain businesses," Teach said as he gazed across the seemingly endless rows of corn. "It's a buyer's market out there. If you can show someone a site with a road, a sewer line, a railroad line, and they can come in and build tomorrow, it's a lot easier than if you just show them an empty field."

The area's dependence on manufacturing recently hit home for Teach, 34, when his brother Joe became one of more than 1,000 workers laid off by Mack Trucks, the county's largest employer.

Fairchild Republic, which employs more than 2,000 people at its huge assembly plant here, is building more than 100 mid-fuselage sections and wing components for Boeing's new line of commercial jets. But Fairchild workers must use a 50-ton crane to truck the fragile plane sections down Rte. 11 to the Conrail station, a process that is both risky and expensive.

Teach has asked the EDA to approve a $3 million, four-mile rail spur that would enable the company to ship the parts directly to Boeing. But although Fairchild has agreed to contribute $550,000, Teach says the project is in jeopardy.

The EDA also refused to finance improvements at the county airport just north of the Fairchild plant. The small airfield is used by only one airline, Allegheny Commuter, and county officials say there is only a slight chance that the Federal Aviation Administration will help expand and renovate the terminal.

While they are waiting, they will have to content themselves with nine new replacement buses for Hagerstown's 14-bus fleet. The Urban Mass Transit Administration, which picked up most of the $988,000 tab, also is providing $51,000 this year to keep the bus fleet running.

"Without that money, we wouldn't have been able to survive," said Keith Godwin, the county transportation director, who is facing a sizable deficit despite a recent fare increase from 35 to 50 cents. "I doubt if the county commissioners would have been willing to pay for new buses."

But Godwin was less than enthusiastic about a federal law that forced him to put wheelchair lifts on each of the buses, at a cost of $10,000 apiece. He said he already has two specially equipped vans for the handicapped that provide cheaper, door-to-door service. The federal requirement later was lifted, but not until Godwin had ordered the buses.

Most people still get around by car, however, and few of them are driving to the central shopping district these days, especially since two large department stores, Montgomery Ward and Eyerly's, relocated in the new Valley Mall in suburban Halfway.

Many shoppers find it far easier to park at the mall than on the narrow, truck-filled streets downtown, where the meters cost only a nickel an hour and people tend to use the spots all day. City officials are convinced that the only way to bring the shoppers back is to build a $3 million parking garage with 400 to 500 spaces. But the ARC recently withdrew $400,000 in funding for the garage.

"Part of Hagerstown is empty," said Mayor Donald Frush, pointing to a vacant second-story store across the street from his City Hall office. "It's just not paying its own way."

"The downtown core of Hagerstown once paid 47 percent of the city's expenses. Now it's less than 20 percent. But we still have to provide garbage pickup and snow removal and the same services we did a few years ago." The result is that residents who own houses have been forced to bear more of the tax burden in recent years.

Despite these trends, the silver-haired mayor said: "We are preparing ourselves to counteract all these cuts in federal assistance. We strongly believe that private enterprise can do more than government."

Instead of more federal grants, the mayor wants to give businesses that locate or expand downtown a five-year exemption from city taxes. He said the city also is providing $200,000 in loans at 8 percent interest for commercial renovation projects, although he neglected to mention that this money comes from one of HUD's Community Development Block Grants.

Without question, the seeds of past federal aid have brought some neighborhoods back to life like newly watered plants. Once the town had only 12 restaurants, including the Peoples Drug Store lunch counter, but now formerly vacant stores are being reborn as Japanese restaurants and singles bars.

Steven Sager, 28, the community development director, says that much of this private investment would not have been made without such programs as HUD's Urban Development Action Grants. On West Franklin Street, for example, Government Services Savings and Loan agreed to renovate its bank building only after the city secured a UDAG grant to rebuild the crumbling street.

"We're fortunate that we got most of this stuff in the ground before the change in administrations," Sager said. "Now we're being forced to look at other avenues."

Roger Miller finds himself even more dependent on federal aid. As director of the Hagerstown Housing Authority, he is responsible for 1,055 public housing units, all of which were built with HUD financing at a cost of $16 million.

Some 1,379 low-income tenants here have their rent subsidized by HUD's Section 8 program. The federal agency also is giving Miller $330,000 this year to operate the housing projects, a sharp cutback that will leave his department with a $50,000 deficit.

"We have to make up that shortfall," Miller said. "These subsidies are absolutely necessary. If you cut them beyond a certain point, you can't maintain your housing stock and you can't provide services to tenants."

Miller's office is in a 13-story project for the elderly called Potomac Towers, and he is moving to build a 10-story tower next door with another $7 million in HUD subsidies that soon may be phased out. He also is using $200,000 from yet another HUD program to replace the 30-year-old boilers in some buildings.

Perhaps the crown jewel in Miller's small empire is Alexander House, once the town's leading hotel, that has been renovated into a senior citizens center, one floor of shops and 94 apartments for the elderly. Most of the nine-story, red-and-white brick building was financed by the federal government, which also provides $200,000 a year for hot lunches for senior citizens.

"The taxpayers are pleased to see their money going into this kind of tangible, visible project, as opposed to a missile someplace," said Shirley Guessford of the county's commission on aging. "Of course, everyone wants to cut the budget until the finger's pointing at them."

While there is a long waiting list at Alexander House, there is no shortage of critics who dislike federal housing subsidies. "We have to get away from the idea that the key to success is federal money," said Keller Nigh, a real estate agent and former county commissioner. "We've become the Section 8 capital of the world."

Yet some of the county officials who rail against government subsidies are the first to brag that they have lowered property taxes for the last four years. "I'm just a dumb old country boy, but I think people have to stand on their own two feet," said Commissioner Snook, a boyish-looking Republican who also runs a pet cemetery. People have been going to the well so often down in Washington that the well ran dry."

Pressed as to which programs he would abolish, Snook is less definite. He says the county has too many small post offices, "but every time we try to close one, there's an uproar in the community."

Perhaps no project better symbolizes the town's ambivalence toward federal aid than the massive effort to upgrade Hagerstown's sewage treatment plant. At an acrid-smelling site along the Antietam Creek, more than 200 workers are building a series of massive concrete tanks, sludge compressor pumps, oxygen generators, stainless steel filters and sulfate scrubbers--all of it designed to cleanse more than 4 million gallons of waste water a day.

M.G. (Mike) McGauhey, who runs the town's water pollution department, is more than happy that the Environmental Protection Agency is paying most of the $21-million cost, a fact that allows him to boast of maintaining the cheapest sewer rates on the East Coast. But in the very next breath, the stout, white-haired administrator suddenly will castigate the EPA "for holding a hammer over our heads and saying you have to do this and that."

For one thing, he said, EPA officials held up the project for 14 months by insisting that he give a quarter of the work to minority contractors. "There aren't any minority businesses in Western Maryland," he said. "They just don't exist here. No way a minority contractor is gonna pay travel costs to come up here when he can make more money in Baltimore and Washington." The EPA, however, says it is not unusual for contractors to travel to jobs in nearby cities.

McGauhey also doesn't see why he has to pay higher, union-level wages under the Davis-Bacon Act when most local contractors are willing to work for far less. Finally, he can't understand why the feds insist on calling the old creek a "recreational trout stream," thus forcing him to spend another $1.5 million to meet much stricter pollution standards.

"It never was and never will be a trout stream," McGauhey said. "I just don't see how we can afford to meet such an artificial standard so a handful of people can go fishing every spring. Big government has been taking care of us ever since I was a pup, but it can't continue this assault on our pocketbooks."