Everett Alvarez Jr., deputy director of the Peace Corps, was a prisoner of war in Vietnam for 8 1/2 years, not 8 1/2 months as reported yesterday.

The Reagan administration yesterday forgave Robert P. Nimmo, the embattled head of the Veterans Administration, for using government funds to pay a chauffeur in violation of a 1981 law and decided to keep him as director of the agency.

"The White House has concluded there was no intentional violation of regulations," said White House counselor Edwin Meese III. "The administrator has taken several steps with which the White House agrees to improve both the management and the communications practices within the administration."

This bland announcement did not reflect the sharp difference of opinion over Nimmo among high White House officials. Meese, backed by national security adviser William P. Clark, strongly favored the retention of their fellow Californian, Nimmo, a former state legislator. White House chief of staff James A. Baker III, citing an inspector general's report that showed Nimmo had violated a number of Reagan guidelines, wanted him dismissed.

Reagan, described by one source as not wanting any more changes in his administration after the departure of Secretary of State Alexander M. Haig Jr., sided with Meese.

Nimmo faces strong criticism from veterans groups and especially from Vietnam veterans for supposedly foot-dragging on the budget for examining the consequences of Agent Orange, a defoliant used in Vietnam, and holding back on budget items for counseling centers. The VA administrator strongly denied these allegations in conversations with Meese and others in the White House, and his denial was accepted.

Instead of blaming Nimmo, the White House put the responsibility for these stories on Nimmo's deputy Chuck Hagel, a twice-wounded combat veteran of Vietnam who resigned last week in a letter to the president. Today, in an effort by the administration to show that it is not insensitive to Vietnam veterans, Hagel will be replaced by Everett Alvarez Jr., who was a prisoner of war in Vietnam for 8 1/2 months. Alvarez is a deputy director of the Peace Corps.

Last month a report by inspector general Frank Sato after a six-week investigation found that Nimmo violated a 1981 law by hiring a chauffeur to drive him to work. Meese said the White House had accepted Nimmo's contention that this was done without knowledge by his staff. The inspector general's report said Nimmo was warned twice by the VA counsel's office that this was illegal. Nimmo reimbursed the government $6,44l after the report was released.

The report said that Nimmo also violated a directive that prohibits agency heads from redecorating their offices