The Folger Theatre, the resident professional theater company of the Folger Shakespeare Library since 1970, will close permanently on June 30, according to library officials, who said yesterday that the theater is an increasing drain on the library's budget and represents an unacceptable economic risk for what is primarily an academic institution.

The news came as both a surprise and a shock to the 75 full- and part-time members of the theater group, which is in final rehearsals for "Much Ado About Nothing," the third production of a five-play season. The remaining productions, Shakespeare's "Hamlet" and another play yet to be chosen, will be performed as scheduled. But "at the end of the season, the Folger Theatre, as we know it, will no longer be," said the company's stunned artistic producer, John Neville-Andrews.

The decision to dissolve the company was made over the weekend in New York at a closed meeting of the board of trustees of Amherst College, which administers the Folger Library. Although the library has covered the theater's deficits in the past, trustees were unwilling to continue to support the theater at the expense of "basic library functions," according to Dr. Werner Gundersheimer, the library's director.

"This year, we are looking at what is fairly certain to be a major loss -- in the area of $180,000 to $250,000," said Gundersheimer yesterday. "In a relatively small institution like this, to be exposed to these kinds of risks makes it virtually impossible to plan for the library's own programs."

The Folger Theatre's managing director, Mary Ann de Barbieri, said yesterday that it is difficult to estimate how big this season's loss will be. The theater operates on an annual budget of approximately $1.6 million, of which $1.2 million is projected to come from box-office revenues. "King Lear," the season's opening production, grossed $14,000 more than projected, but the cancellation, two weeks earlier than announced, of the Christmas pantomime, "Crossed Words," cost the company $130,000. The company also received a setback this season when the National Endowment for the Arts reduced its grant to the Folger from $17,500 to $3,500.

With only 253 seats, the Folger has "a very small margin for error," de Barbieri said. Under its mandate from the library, it produces a repertory of classical plays that require large casts and lavish costumes -- and consequently are far costlier to stage than most modern dramas. Even though attendance has averaged 80 to 85 percent of capacity in recent years and more than 60,000 patrons attend Folger productions each season, deficits have been unavoidable. They have ranged from a low of $40,968 (in the 1982-83 season), which the theater itself covered with its own cash reserve, to a high of $493,000 (for the 1980-81 season), which the library assumed.

The Folger Theatre was launched with the blessing of O.B. Hardison Jr., then the library's director. It was Hardison's idea to activate the long-dormant replica of the Old Globe theater in the building; in 1970, he hired Richmond Crinkley to take charge of the company. While Hardison was in power, the theater had a strong advocate before the Amherst trustees. Hardison, however, stepped down in December 1983 to assume a professorship at Georgetown University.

Gundersheimer, who replaced him last year, said that he was "appreciative" of the theater's past efforts, but insisted that "essential needs of the library have to be redressed at this point." Among the priorities he cited were increasing the library's acquisitions budget, funds to bring visiting scholars here, and staff salaries, which he described as embarrassingly low.

The library, founded in 1932, houses one of the world's finest collections of Elizabethan, Renaissance and 18th-century rare books and materials. It has a private endowment of $28 million, which, Gundersheimer said, currently covers only one-third of the library's operating costs.

Hardison refused to comment on the trustees' action yesterday, but Crinkley, who presided over the company's first three seasons, called it "a highly questionable decision that flies in the face of public interest."

Reaction throughout the Washington theater community ranged from sad to indignant. "I am very sorry to hear that the Folger is planning to discontinue theater operations, since they've done some very fine productions over the years," said Roger Stevens, chairman of the Kennedy Center. (During the 1979-80 and 1980-81 seasons, in partnership with the Center, the Folger produced a series of contemporary plays in the Terrace Theater. One of them, the musical "Charlie and Algernon," later went on to an unsuccessful Broadway run.)

Zelda Fichandler, the producing director of Arena Stage, termed the announced closing "a tragic loss, not just for the arts community, but for all Washington" and said that it reflected a nationwide dilemma facing many arts groups, which, limited in earning power by their seating capacity, are also confronted with dwindling subsidies. "The Folger has played a pivotal role between the larger theaters like Arena Stage and the Kennedy Center and the smaller theaters," said Howard Shalwitz, president of the League of Washington Theatres. "And it's the only one that does year-round Shakespeare. We're all trying to make Washington a center where actors will come. But there aren't enough salaries to go around as it is. These people will probably look for work elsewhere."

Some of the Folger staff were informed of the closing after Sunday night's rehearsal; others learned the news at a hastily called meeting yesterday. "The atmosphere was charged with tension," said Neville-Andrews. "There were some tears. They've been guillotined." There was general resentment that a decision affecting the Washington community was made by a group of trustees, most of whom live and work in other parts of the country, he added. One company member said sadly, "I was just going to buy a house."

The Amherst trustees were advised by an eight-member ad hoc committee on the long-term future of the Folger Theatre, which includes Jane Weinberger, wife of the defense secretary. The committee recommendation to close the theater "had general support," said Gundersheimer, who estimated that over 15 years, the library has pumped nearly $2 million into the theater. A direct fund-raising appeal to the community was rejected as insufficient to deal with the problem.

While the trustees are not discounting the notion of theatrical activities in the future, Gundersheimer said the "long-range interests" of the library as "a center for scholarship" precluded a resident company like the existing one. "I could conceive of some kind of chamber theater there," he elaborated. "I could envision a marvelous all-city high school Shakespeare competition, presenting scenes for a week. Or having small subsidized troupes coming here." The library might be prepared to provide a yearly subsidy for a continuing company "on the order of $50,000 a year," he added. But such a company, he said, would have to have an autonomous board of directors, willing to take responsibility for deficits.

"We knew there were problems and thought that changes would be asked for next season," said Neville-Andrews, who learned of the trustees' action on Sunday morning. "I was prepared to work them out. As a budget-reducing measure, I was considering only two Shakespeare plays, one other classical play and two smaller-cast modern plays for next year's season. But this just closes the door on us. It's not the most convenient time to receive this news, but I don't think they wanted us to incur any extra costs by planning the upcoming season."

Also affected by yesterday's announcement is the Folger Conservatory, in which company members teach weekly acting classes for adults and young people. Operating since 1982, the conservatory turns a small profit. About 65 students are enrolled in the program, some on scholarships.

The Folger Theatre has presented more than 70 productions, mostly plays by Shakespeare, since its inception. But under Louis Scheeder, its artistic director from 1973-81, it also staged the American premieres of such important contemporary dramas as "Creeps," "The Farm," "Teeth 'n' Smiles" and "Whose Life Is It Anyway?" Scheeder resigned after the library asked him to reduce his budget for four Shakespeare plays to $1 million. "I've got the theater I always wanted," he said at the time. "And I don't want to take it apart. They want someone who can build a cheaper machine."

Neville-Andrews, a British-born actor who had appeared in 10 Folger productions, assumed the artistic leadership in the fall of 1981. He has directed many of the productions since then -- among them "King Lear," "The Merchant of Venice" and "Much Ado," which opens on Monday -- and the quality of the acting has risen significantly under his stewardship. Recently, he has invited celebrated guest directors to work at the Folger; British film and theater director Lindsay Anderson is scheduled to stage the upcoming "Hamlet." Neville-Andrews said he would now offer Anderson the chance to withdraw from the assignment, but didn't expect the director to take him up on it.