American food aid to Ethiopia has been freed from a web of legal strings that relief officials here have said were damaging efforts to help this country recover from famine.

The lifting of restrictions on so-called development aid to Ethiopia means that for the first time relief agencies here will be able to use U.S. food and money to support projects that help farmers rebuild their farms, dig irrigation ditches or build roads.

In the past, U.S. law prevented the use of any American food here for food-for-work schemes that paid peasants food in return for work that helped them rehabilitate their drought-seared farmland.

This restriction on U.S. aid -- which amounts to $222 million, about one-third of the international famine relief effort in Ethiopia -- had been criticized by relief officials here. Commenting recently on the restriction, Niels Nikolasen, head of Lutheran World Federation, said: "We can only give American food to people who are sitting on their ass . . . this is schizophrenic aid. You keep people alive only to starve."

The change in U.S. relief policy for Ethiopia was mandated in part, by the language of a $137.5 million supplemental appropriation for emergency famine relief in Africa, passed by Congress on April 2. The change also is the result of a more liberal State Department interpretation of existing laws.

During the past six months, since the United States became Ethiopia's largest donor, restrictions on U.S. aid had forced officials of the Agency for International Development into making scores of decisions about which uses of U.S. aid were "relief" and thereby allowed and which were "developmental" and proscribed.

Two laws, the Hickenlooper and Brooke amendments, both of which applied to Ethiopia's failure to pay its debts to the United States, forced AID to make these distinctions.

The April supplemental famine appropriation waives the Hickenlooper language barring development aid to countries, such as Ethiopia, that have nationalized American property. The bill, however, did not waive the Brooke amendment, which prevents development aid to countries that fail to repay U.S. government loans. Ethiopia has not paid off a 9-year-old U.S. loan for military equipment.

The letter going out to relief officials here, however, says that the U.S. government now does not consider Hickenlooper or Brooke to inhibit the use of the supplemental money for development.

Before the change, the AID office here had not permitted U.S. food or money to buy seed, trucks or shovels. The office had decided to pay for water wells in drought-affected villages but had warned that the water could be used for drinking only, not for irrigation.

Now, according to the letter sent to relief agencies here, U.S. resources can be used for a range of previously proscribed rehabilitation programs, including the purchase of seeds for planting, fertilizer, pesticides, farm implements, farm animals, shelter, small scale agricultural projects and water projects. The letter says specifically that money can be spent on food-for-work programs.

The intent of the change is to help drought victims return to productive farming through small-scale projects.

The ending of restrictions on the use of American aid is likely to increase the number of proposed projects that AID officials here must approve and supervise. They are now managing $222 million worth of aid to Ethiopia with a staff of five people.

The Ethiopian government has been unwilling to accede to U.S. Embassy requests that more AID workers be allowed to live in the country.