The reception of a freed Nazi war criminal by Austria's defense minister yesterday has caused an uproar that has deeply embarrassed this country's government one day before the World Jewish Congress assembles here for its first conference in Vienna since before World War II.

Several Austrian politicians, including the deputy mayor of Vienna, demanded the resignation of Defense Minister Friedhelm Frischenschlager today. Chancellor Fred Sinowatz, who said he was unaware of the meeting until after it had happened, publicly condemned it as "a grave political mistake."

Israel Singer, executive director of the World Jewish Congress, initially played down the incident in a news conference this morning, saying Austria's treatment of its homecoming war criminals was an internal matter and "not our business."

But he added that Frischenschlager's act "has shown what a very poor educational record Austria has in teaching its young people how to behave 40 years after the end of the war."

Frischenschlager, one of three members of the small, rightist Freedom Party in the Cabinet dominated by Sinowatz's Socialist Party, said he would not resign and would give a full report on his actions before leaving Saturday on an official visit to Egypt.

The exact circumstances of the meeting between Frischenschlager and Walter Reder, 69, a former major in the Nazi SS, at a military airport in Graz, Austria, yesterday, and Frischenschlager's helicopter flight with Reder to an Army barracks at Baden, south of Vienna, remained in dispute today.

Reder had been convicted in Italy of leading a 1944 massacre in which 1,830 residents of Marzabotto died in retaliation for partisan attacks against German troops.

He reportedly is seriously ill, and the Austrian government had endorsed a move by Roman Catholic church officials and others that, as a humanitarian move, he be released early from a 40-year term that was to end in July.

Former chancellor Bruno Kreisky, who had sought Reder's release, told The Associated Press that the Austrian government also feared that if Reder died in prison he could become "a myth" for Austrian rightists.

Italy freed him yesterday without public announcement, and he was flown to Austria, where he arrived, looking haggard and bent. He reportedly will live at the military barracks in Baden, at least temporarily.

Diplomatic sources said Foreign Minister Leopold Gratz asked Frischenschlager to handle Reder's return and keep it secret to prevent demonstrations "but didn't ask Frischenschlager to receive him personally," one source said.

According to one source, Frischenschlager based his action on an assumption that Reder had not been released but transferred to Austrian custody, and thus, according to the Geneva convention, was subject to military control.

Frischenschlager told reporters today that only by meeting Reder himself could he ensure the secrecy of his return.

Several Jewish leaders gathering here for the conference criticized what one called "the apparent hero's welcome" Frischenschlager extended to Reder, Italy's last Nazi war prisoner.

Erhard Busek, Vienna's deputy mayor, called for Frischenschlager's resignation, saying that this year's celebrations of the 40th anniversary of the defeat of Nazi Germany "cannot match the damage the defense minister has done to Austria by receiving a former SS major."

Frischenschlager, 41, has been defense minister since the present government was formed in May 1983. He publicly has advocated an "open policy" on Austria's Nazi past, sometimes attracting attention with bizarre acts. In October 1983 he swore in 550 Army recruits at the infamous Mauthausen concentration camp, against the wishes of older politicians.