A former major arrested in connection with the kidnaping of a wealthy landowner is believed to have headed "death squads" with about 400 members, police said today.

The government, apparently trying to show it is making progress in human rights, as President Reagan certified yesterday, also announced it had uncovered a multimillion-dollar fraud scheme in its agrarian reform program.

Guillermo Bustamante, a member of one of El Salvador's wealthiest families, was kidnaped two weeks ago and released last night in a special forces operation, a police source said.

The source, who requested anonymity, said former major Guillermo Roeder Escobar was taken into custody when he went to pick up the more than $4 million ransom that the kidnapers had demanded.

"Many things will come out during the investigation, among them kidnapings and assassinations," the source said.

"We believe that he had control of some 400 men who acted as death squads," said a high police official, who also asked not to be named.

The police source said Roeder organized groups of armed men to give "protection" to local and foreign businesses.

Church and human rights groups have alleged that the government has links to paramilitary, rightist groups blamed for thousands of deaths in the past two years of civil strife in El Salvador.

The government disclaims responsibility for the death squads' activities. Kidnaping Suspect Seized in Salvador

SAN SALVADOR, Jan. 29--A former major arrested in connection with the kidnaping of a wealthy landowner is believed to have headed "death squads" with about 400 members, police said today.

The government, apparently trying to show it is making progress in human rights, as President Reagan certified yesterday, also announced it had uncovered a multimillion-dollar fraud scheme in its agrarian reform program.

Guillermo Bustamante, a member of one of El Salvador's wealthiest families, was kidnaped two weeks ago and released last night in a special forces operation, a police source said.

The source, who requested anonymity, said former major Guillermo Roeder Escobar was taken into custody when he went to pick up the more than $4 million ransom that the kidnapers had demanded.

"Many things will come out during the investigation, among them kidnapings and assassinations," the source said.

"We believe that he had control of some 400 men who acted as death squads," said a high police official, who also asked not to be named.

The police source said Roeder organized groups of armed men to give "protection" to local and foreign businesses.

Church and human rights groups have alleged that the government has links to paramilitary, rightist groups blamed for thousands of deaths in the past two years of civil strife in El Salvador.

The government disclaims responsibility for the death squads' activities.