Secretary of State George P. Shultz is caught in a sensitive foreign aid dispute over the Reagan administration's support for the U.N. Fund for Population Activities.

Shultz is under pressure from the Agency for International Development, the federal agency that dispenses foreign aid to the Third World, to suspend support for UNFPA because of its involvement in alleged coercive abortion and involuntary sterilization in China.

On the other side, the Peking government and U.N. Secretary-General Javier Perez de Cuellar have appealed to Shultz to continue U.S. government support for UNFPA.

Chinese President Li Xiannian has attacked reports of infanticide and forced abortion in his country as a "total fabrication and distortion." Chinese officials have written to Shultz asking him to use his influence to "prevent this state of affairs from getting worse so as to avoid any damage to Sino-U.S. relations."

The U.S. government is the single largest contributor to UNFPA, providing about 25 percent of its budget. The UNFPA is the largest donor organization funding family-planning programs around the world.

Although Shultz's views on UNFPA are unclear, his decision on the issue -- to be made by Sept. 30 -- is a key one for future international planning efforts. It turns on the question of whether money going to UNFPA is somehow supporting coercive abortion and sterilization in China.

If UNFPA is judged to be involved in such programs, then new legislation provides that all U.S. funding to UNFPA could be cut off.

State Department sources acknowledge that Shultz faces a tricky balancing act, weighing Chinese sensitivities against the threat of an assault from antiabortion activists.

The UNFPA policy decision has fallen to Shultz after a protracted and complex congressional battle over U.S. government funding for UNFPA this fiscal year.

In February, under pressure from antiabortion legislators, AID Administrator M. Peter McPherson froze a $46 million grant to UNFPA and ordered a review of the U.N. body's China population program.

The majority of the funds -- $36 million -- were released in March after an AID report said there was "no evidence of UNFPA intentionally or actually promoting or supporting abortion in any country . . . ."

But McPherson withheld the outstanding $10 million for fiscal 1985 because of "the family planning programs of one country." Though unnamed, the country was universally identified as China; the amount withheld corresponded to the UNFPA allocation scheduled for that country for each of the next five years.

The $10 million has subsequently been the subject of a congressional tussle between antiabortion legislators, led by Rep. Jack Kemp (R-N.Y.) and Sen. Jesse Helms (R-N.C.), on one side, and others such as Sen. Daniel K. Inouye (D-Hawaii).

Under a Kemp-Inouye compromise amendment to the supplemental appropriations bill for 1985, the government is barred from funding organizations that "support coercive abortion programs or participate in their management."

But the burden of ruling whether UNFPA supports such a program is on someone of at least the status of the secretary of state, if not the president.

Shultz therefore faces the question of whether to free the $10 million or to determine that China is involved in coercive abortion and jeopardize future U.S. support for family planning.

According to State Department sources, AID Administrator McPherson is pressing Shultz to suspend support for UNFPA by setting tough conditions for the future: either UNFPA withdraws from China or China alters its population program to keep within the Kemp language on coercion in family planning.

Aside from the pressure from AID, Shultz has been lobbied fiercely by the Chinese and the U.N. secretary-general.

On the other side, Bob Marshall, research director of the antiabortion American Life League, said: "We don't want to be part of forced sterilization. If Shultz comes out in favor of China, we will see how he weathers the storm and agitation which will follow."

Other population watchdogs disagree. Werner Fornos, president of the Washington-based Population Institute, a private organization that supports assistance to the Third World, said: "The United States has just signed a $6 billion nuclear power deal with the Chinese . . . . That semipermeable membrane which we call a bureaucracy is saying we can accept the word of the Chinese on bombs but not on abortion."