The House intelligence committee concluded yesterday that a CIA manual advocating the "selective use of violence" to "neutralize" officials of Nicaragua's Sandinista government was illegal, embarrassing and proof of the agency's lack of control over the covert war.

However, "negligence, not intent to violate the law, marked the manual's history," the committee said in a press release that was drafted with bipartisan support.

The release followed a two-hour closed hearing in which CIA Director William J. Casey acknowledged that the agency had been negligent in its handling of the manual. But he denied any intentional effort to circumvent the 1982 law against overthrowing the Sandinistas.

The press release, based on a long staff investigation of the 90-page manual, drew no conclusions about who was responsible for the handbook or whether they should be disciplined. It said only that the document was "written, edited, distributed and used without adequate supervision."

The release added that "the incident of the manual illustrates once again to a majority of the committee that the CIA did not have adequate command and control of the entire Nicaraguan covert action."

Congress has since voted to cut off money for the operation. President Reagan has indicated that he will push to restore it next year.

The manual, which also recommends blackmailing individuals to force their support, creating "martyrs" and hiring professional criminals, was distributed in 1983 to CIA-backed rebels fighting the Nicaraguan government.

Chairman Edward P. Boland (D-Mass.) said that Casey told the committee, formally the Permanent Select Committee on Intelligence, that the manual had been produced and released without proper supervision and that any violation of the 1982 law was unintentional.

Casey said the use of "neutralize" in the manual did not mean killing people and therefore was not a violation of an executive order banning assassinations by the CIA. The committee concluded that there had been no intentional violation of that executive order.

The manual states: "It is possible to neutralize carefully selected and planned targets, such as court judges, police and state security officials, etc." The manual stresses that "it is absolutely necessary to gather together the population affected, so that they will be present and take part in the act," with the guerrillas explaining "why it was necessary for the good of the people" to "neutralize the target official."

Boland said Casey told the committee that the agency has put in place several new programs to prevent violations from occurring in the future, including a program to brief agents on the 1982 law and an earlier executive order banning assassinations.

Casey said the CIA was recalling the 1,400 outstanding manuals, other sources said.

Boland said he believes that Casey must bear ultimate responsibility for the manual, but that lines of communication within the CIA had been so poor that it was difficult to figure out who actually approved and released the manual.

In addition, he said, senior CIA officials in Washington and in the field never read the manual and learned what was in it only after its existence was revealed by the Associated Press, a fact that Boland said he found "incredible."

Boland said he was satisfied with a CIA inspector general's report that recommended disciplining six low- and mid-level employes who had been directly involved with the manual's production and distribution. The Associated Press has reported that several of those reprimanded believe they are being made scapegoats to protect senior CIA officials.

Rep. Norman Y. Mineta (D-Calif.) said that while the committee was not able to pin down specifically who made the final decision to go ahead with the manual, he felt that the six CIA employes mentioned by the inspector general had been "made scapegoats. The blame should've gone a little higher."

Mineta, who in past flare-ups over the CIA Nicaragua operation has demanded Casey's resignation, repeated that call and added that congressional intelligence committees must be much tougher on the agency in the future.

Another member and frequent Casey critic, Rep. Wyche Fowler Jr. (D-Ga.), emerged from the hearing yesterday with Casey and said he did not think the CIA director should resign over the incident.

The committee's press release, which Boland and others said was a bipartisan effort, stated that the original purpose of the manual was to provide training to "moderate" rebel behavior. It was written and distributed following reports of atrocities by guerrilla leaders.

However, the release states, "specific actions it describes are repugnant to American values."

It found that the record of the manual "reflects insufficient concern about congressional and legal restrictions on CIA activities."