The D.C. Zoning Commission unanimously rejected yesterday a highly controversial proposal to build 120 luxury town houses on the steep, heavily wooded site of the old Tregaron estate in Northwest Washington.

The commission's 4-to-0 decision to deny the application of the Tregaron Limited Partnership to build clusters of $330,000-apiece town houses on the historical site was a major victory for a group of Cleveland Park residents who have fought the project for the past two years.

"We're very pleased," said Sheldon Holen, a dentist and president of the 300-member Friends of Tregaron, which favored scaling back the project to about 60 dwellings. "I think they the commissioners did the only logical and rational thing they could with the information provided them."

After two months of detailed and occasionally heated public hearings, the zoning commission sided yesterday with the opponents in concluding that the proposed development was too large, would cause traffic congestion and would mar the unique character of the hilly 14.6-acre site, which adjoins the Washington International School.

However, commission Chairman Walter Lewis and two other commission members said they still favored construction of some type of housing on the site and urged the developer to "go back to the drawing board."

"I'm not one of those who said no development should occur," Lewis said. "I agree with the applicant . . . that this has to be a planned unit development. But I don't think the development team has been imaginative enough . . . . "

John G. Parsons, associate regional director for the National Park Service and a member of the zoning commission, urged the developer to consider building one or two mid-rise apartment buildings, instead of clusters of large town houses, to preserve the site's park-like character.

"Where I come out on this excessively steep and historic site . . . is that a new design approach is the only solution," Parsons said.

Alan R. Novak, a partner and chief executive of the proposed development, said yesterday he was disappointed by the commission's decision but would return with a new proposal later this year.

Later in the day, E. David Harrison, general counsel to the developer, told a reporter that his firm now is interested in pursuing Parsons' idea for mid-rise apartments, which, according to Harrison, would be a more intense use of the land than the developer proposed.

"We'll certainly take this to heart," said Harrison. "We originally thought of buiding apartment units on the site but . . . we felt the neighborhood would prefer single-family dwellings over an apartment building. We've now been given direction by the commission that mid-rise construction would be a good and sensitive way to approach it."

Tregaron, a designated historical landmark, is located southwest of the intersection of Connecticut Avenue and Macomb Street NW. The property was sold in late 1980 for $4.6 million by the heirs of Joseph E. Davies, a wealthy Washington lawyer and ambassador to Moscow before World War II, under a court-ordered settlement.

The Washington International School acquired the estate's Georgian-style mansion and about six acres of land. The remaining land was purchased by the Tregaron Limited Partnership, formed by Novak, a lawyer, and Raymond A. Lamontagne of Wilton, Conn. Shaul N. Eisenberg, an enigmatic international businessman who lives in Israel, acquired a major interest in the development in 1981.

Under the current R-1-A zoning, the developer may build about 80 detached single-family homes on lots of at least 7,500 square feet, but that would require cutting down many trees and spoiling the topography.

The developer had asked the zoning commission to upgrade the zoning to R-1-B, to permit construction of 120 townhouses. In return, the developer promised to cluster the town houses on a fraction of the property to preserve the trees.