The Housing and Urban Development Department has offered critics a small concession in its plan to relieve cities of having to spend most of their community development funds on the needy. But Democrats on Capitol Hill are still threatening to block the move.

HUD remains intent on dropping regulations that force cities to spend at least 75 percent of these block grants on projects that benefit low- and moderate-income people.

But after a storm of criticism, the agency has changed the proposal to allow HUD to reduce or cut off the aid if the secretary finds that a city's overall use of the money is "plainly inappropriate."

The change was made just before HUD general counsel John J. Knapp appeared at a hearing this week of the House subcommittee on housing and community development. Subcommittee members promptly criticized the new language as vague and unenforceable.

"You might be able to let cities get away with murder under that standard," Rep. John J. LaFalce (D-N.Y.) told Knapp. "I think you're fudging on this issue. Low- and moderate-income people . . . are going to be shut out of the picture."

"You're sending the wrong signal to cities," said Rep. Mary Rose Oakar (D-Ohio). "I think just about any project could qualify under the guidelines you've given."

Knapp acknowledged that it might not be "plainly inappropriate" for a city to spend less than half its community development grant money on the poor.

The rules also would allow a city to use the funds to renovate buildings where only 20 percent of the tenants have low and moderate incomes.

But Knapp said that few cities have been penalized even under the stricter rules, adding, "We believe that our proposed standard will not be unfair or unworkable."

In the name of providing greater local discretion, HUD proposed in September to let cities use the grants as they wished for any of the program's three categories: helping the needy, fighting urban blight, other "urgent" needs.

But nearly two dozen groups--from the National League of Cities to the National Urban League--have opposed the changes.

Subcommittee chairman Henry B. Gonzalez (D-Tex.) said the HUD proposal still ignores Congress' clear direction that the grants be used primarily to help the needy.

Other panel members criticized the Office of Management and Budget for proposing that the $3.4 billion program be cut by $330 million in fiscal 1984.