Charles H. Quandel was mayor of Pottsville, Pa., when the city won a $1.2 million Urban Development Action Grant for a hotel project. He resigned last year and became the developer; other hotel owners cried foul.

A crane company in St. Paul, Minn., agreed to open a plant in North Carolina with a $4 million UDAG award. Now the firm is moving equipment to the new plant and laying off 500 workers in St. Paul; the city's congressman is livid.

For every winning mayor or developer under the $440 million federal grant program, there are a growing number of increasingly vocal losers -- cities that miss out, workers whose firms move out, competitors who feel left out. This internecine warfare threatens to erode the program's political base at a time when President Reagan is trying to kill it.

The Office of Management and Budget said in a report that UDAG's awards "politically reshuffle the national economic pie, not expand it. These federal subsidies provide war chests with which local political units compete with one another for plant and job location."

Opponents also say too many grants are used for luxury hotels and convention centers that make little sense or would have been built without the added subsidy. One critic, Stuart Butler of the Heritage Foundation, calls UDAG "an urban slush fund."

But the Carter administration program is popular with mayors of both parties. They say the grants are worth five or six times their weight in private investment and enable them to revitalize downtown areas with a minimum of federal interference.

About 20 large northern cities, led by New York, Baltimore and Detroit, have gobbled up nearly half the UDAG money under a funding formula sharply tilted toward communities with older housing and high unemployment. Many southern mayors are clamoring for a greater piece of the action.

"Does this program provide relative advantages for communities that can get these grants? Yes it does," said Rep. Bruce F. Vento (D-Minn.), an original sponsor of the seven-year-old program.

"I don't think we have to apologize for that," Vento said. "There's only so much money. If you're going to make everyone eligible, then it loses its focus. There are always going to be some winners and some losers."

One of the losers is Richard Welker, owner of the $25-a-night Pottsville Motor Inn. He said it is "definitely a conflict of interest" for Quandel, the town's former Republican mayor, to use UDAG funds to compete with him.

Quandel was mayor in 1983 when the depressed city got the UDAG award to help finance a new downtown hotel. Quandel's architectural firm did the design work.

Quandel said that it was handled by his partners and that he agreed not to share in the profits.

When the original developer dropped out, Quandel, after resigning as mayor, developed a new plan to turn an adjacent department store into a hotel. HUD initially decided that Quandel and a partner could use the original grant without the city's submitting a new application; a final decision is pending. "I'm not going to deny there's a perception problem, but there's nothing wrong with my association with this project," Quandel said, adding that his is the only architectural firm in town.

Jeffrey Finkle, a deputy assistant secretary of Housing and Urban Development, said his agency has granted Quandel a legal waiver. "On the face of it, it looks like a conflict," he said. "But the law allows conflicts to exist."

In the St. Paul controversy, Vento charged that American Hoist and Derrick Co. misled HUD officials in seeking the grant for a new facility in Wilmington, N.C. Vento said the firm originally assured him that few jobs would be shifted to the North Carolina plant but now is laying off 500 of its 1,100 crane workers in St. Paul.

American Hoist spokesman William Faulkner said that only 200 of the 500 layoffs are related to the North Carolina plant, which he said will build huge construction cranes that cannot be made in St. Paul. He said the firm has not misled anyone and is confident that it complied with the program rules.

But Vento said he has sent HUD internal documents purporting to show that the firm is moving equipment to the new plant for cranes that would have been built in St. Paul. "These cranes will be made . . . in a federally assisted facility in Wilmington, and the skilled men and women who previously made these cranes will be standing in the St. Paul unemployment lines," he wrote HUD officials.

Finkle said HUD has asked American Hoist to explain. He said the department has tightened its rules "to prevent cities from using UDAG dollars to move jobs from one distressed city to another."

Despite this regional warfare, Vento said that Congress is unlikely to eliminate UDAG. But, he added, "this sort of abuse does not help the credibility of the program."