A federal magistrate yesterday rejected a request by Justice Department lawyers to extradite Michael V. Townley, who plotted the 1976 assassination of former Chilean ambassador Orlando Letelier, thus blocking efforts to send the American to Argentina where he would face separate murder charges.

The ruling makes the 40-year-old Townley a free man. He has already served more than five years in federal prison for the Letelier killing. Under terms of his plea agreement in that case, federal authorities must help him settle elsewhere in the U.S. under a new identity.

Magistrate W. Harris Grimsley said more than 90 minutes of arguments by Justice Department lawyers yesterday afternoon failed to convince him that the Argentine government had a case against Townley independent of statements he had given in 1978 to prosecutors when he reached his plea bargain in the Letelier case. In return for that plea Townley was promised immunity from further prosecution.

Grimsley said it would be "unfair" and "complete hypocrisy" for the U.S. to permit a foreign nation to use information Townley supplied prosecutors in reaching the plea bargain. While protection from extradition was not spelled out in Townley's bargain, Grimsley said the former Chilean intelligence operative should not be forced to face the murder charges in Argentina.

The magistrate said his decision was based on "a sovereign nation giving its word."

Townley was paroled in April after serving 62 months of a 10-year sentence for murder conspiracy in the Letelier slaying, but before he left prison he was arrested pending resolution of Argentina's extradition request. Authorities said yesterday it is likely that he will now take part in the federal witness protection program that would give him a new identity and resettle him.

Letelier died with coworker Ronnie Moffit in 1976 when a bomb exploded in their automobile as it rounded Sheridan Circle on Embassy Row in Northwest Washington. In his statements, Townley pleaded guilty to carrying out the bombing on behalf of DINA, a Chilean government security agency.

Townley's attorney, Jeffrey M. Johnson, had maintained that some Chilean officials would like to have his client killed. Townley has been charged in Argentina with taking part in the Sept. 30, 1974, car-bombing deaths of Gen. Carlos Prats and his wife, Sofia Cuthbert Prats.

" . . . While we don't condone the activities of Michael Townley, it is heartening to know that the word of the United States is good," the lawyer said.

"Although he is now free, in our minds that does not mean he is innocent of the Prats' assassination," said Maria Angelica Prats Cuthbert and Sofia Prats Cuthbert, daughters of the slain Argentine couple, in a statement released after the hearing.