The Pennsylvania Avenue Development Corp. yesterday selected Western Development Corp., developers of the Georgetown Park shopping mall and the Washington Harbour complex on the Potomac River shoreline, to construct a pair of residential, office and retail buildings at the Market Square site on the avenue.

PADC officials described the site, located on the north side of Pennsylvania between Seventh and Ninth streets NW, as the last major tract on the avenue where development rights had not been awarded in the 20-year effort to upgrade what sometimes is called America's Main Street.

The agency met behind closed doors for nearly three hours before choosing Western's $150 million project for the coveted site.

Western said that starting in early 1986 it would build two nearly identical 13-story neo-classical buildings with large colonnades that would form a semi-circle around the Navy Memorial that PADC had already approved for the front of the site. The project would be completed in early 1988.

The Western Development plans, designed by the Hartman-Cox architectural firm here, call for 225 condominium housing units on the top four floors that will each cost from $137,000 to $210,000; office space totaling 379,000 square feet; and a collection of service stores and restaurants in 70,000 square feet of retail space.

Henry A. Berliner Jr., PADC's board chairman, called Western's selection "crucial to the success of Market Square and the eastern end of Pennsylvania Avenue."

Herbert S. Miller, Western's president, said, "Some of the other developers think the housing is a negative at the Market Square site . We think it's a postive. It will make Pennsylvania Avenue very much like the Champs Elysees" in Paris.

The awarding of the Market Square development rights is the latest chapter in the refurbishing of the avenue, once the site of small shops with no sense of the grandeur befitting a boulevard that connects the Capitol and the White House.

In the last few months, construction has begun on a variety of projects along the avenue, including large-scale office buildings and the renovation of the Willard Hotel. In addition, several parks, office buildings and the J.W. Marriott Hotel have been completed, the Old Post Office restored and the National Theatre refurbished and reopened.

Berliner said the PADC board voted 10 to 1 in favor of Western and its partner, Kan Am Realty Inc., both of which are based here. He said their offer to guarantee payment of the $26-million purchase price of the land at the site, and to pay $16 million of it when the deal is closed sometime next year, helped convince the board.

Berliner said PADC had paid $21 million for the land and that the $5 million profit would be used to buy other development sites near Pennsylvania Avenue where housing could be constructed.

Berliner said Western's financial package "was substantially more favorable than that offered" by the other finalist, a development team that was headed by the Lincoln Property Co. of Dallas and included the Evans Development Co. of Baltimore, the firm that renovated the Old Post Office building.

One of Western's key officials is Thomas J. Regan Jr., PADC's former executive director. His successor at PADC, M. Jay Brodie, said that Regan had had only one contact with him about Western's bid and that his request for more time to submit a proposal was rejected.

While PADC's selection is considered final, Berliner said the PADC board would give the development rights to Lincoln if for some reason it could not settle with Western on all financial and architectural details.

Berliner said construction would start next February on the $10-million Navy Memorial, a combination urban plaza and tribute to the nation's naval forces. The central feature of the plaza -- to be used for concerts by the Navy Band and other military musicians -- is a 100 foot wide flat disc with stonework paving forming a map of a large portion of the world, with Washington, D.C. fixed at the center of the circle.

With the inclusion of 225 units of housing in the Market Square development, a total of 421 are now planned or under construction along Pennsylvania Avenue.

The Westminster Investing Corp. has started construction on twin structures at 601 Pennsylvania Ave. that eventually will include 225,000 square feet of office space, a 240-room luxury hotel and 196 market-rate condominiums.

Still, the development of any housing at all along Pennsylvania Avenue has been among PADC's prickliest problems. PADC originally called for construction of 1,500 units, including 250 low-income units. But the low-income units were scrapped in 1981, the victim of the sharp escalation in downtown land costs, skyrocketing interest rates and a decision by the Reagan administration to trim or end various housing subsidy programs.

Berliner said that while the official goal is now to have 1,200 housing units on the avenue, "I have tried to make a personal goal to have 1,500," and that the chance of achieving that many is good.

But he said that it is "not useful to talk about subsidies" for housing on the avenue to make units available at lower prices because "all you're doing is subsidizing the first-time buyers," who in turn would sell them at large profits.