A six-month investigation has failed to prove that the director of the Indian Health Service "deliberately manipulated" the agency's college scholarship program on behalf of his daughter and a distant cousin, the inspector general of the Health and Human Services Department reported yesterday.

The report on IHS director Everett R. Rhoades also said the Justice Department had advised HHS that "this case does not justify a federal criminal prosecution and should be handled through administrative and departmental procedures."

But Inspector General Richard P. Kusserow said his investigation showed that Rhoades, the first Indian to head the IHS, did not take action to assure that no favoritism would be shown his daughter. Kusserow said Rhoades made no move, even after he was warned by IHS officials that a subordinate was considering "special procedures" to handle the application that had "an appearance of favoritism and conflict of interest."

In the end, Kusserow said, Rhoades' daughter Dorothy won the scholarship without the use of the "special procedures" when the IHS changed its rules and awarded grants to all students who had attained a certain grade point average. Rhoades' daughter won a pre-medical school scholarship to Harvard University that provided $16,055 in 1982 and $17,199 in 1983.

Kusserow said, however, that before the IHS changed its policy, "Dr. Rhoades chose not to conduct, or have conducted, an in-depth and impartial review of the scholarship process or program, nor did he formally recuse himself from the process. He relied on assurances" from the man handling the scholarship awards, Pierre Colombel, "that nothing improper was done in the award process."

Kusserow said that processing of scholarship grants for Rhoades' daughter and his cousin, Lynda Sahmaunt, were "not handled with impartiality. Both grants were handled with the specific knowledge of Dr. Rhoades." But Kusserow said that it "could not be established that Rhoades deliberately manipulated the grants process in either case."

The IG concluded that the "IHS scholarship program was operated in an unprofessional and almost irresponsible manner, and thus was vulnerable to manipulation and abuse. These facts were known to top management of IHS."

In June, Rhoades was temporarily removed as IHS director and reassigned. James Mason, the acting assistant secretary of HHS for health, was out of town yesterday and department officials said no decision had been made on Rhoades' future with the agency.

Eugene R. Fidell, Rhoades' attorney, said that "while we disagree with a number of the findings, we consider the report an exoneration," since no proof had been produced to show that Rhoades actively intervened to help his daughter win the scholarship. "He was reasonable in relying on the advice of the principal staff person, particularly as he was new to the agency," Fidell said.

Kusserow also said he found "no evidence" to back charges that James Felsen, the chief IHS medical officer, was transferred to another agency in "retaliation for his advising Dr. Rhoades about the possibility of a conflict of interest" concerning his daughter.

Kusserow said that when Dorothy Rhoades' initial rating fell below the cutoff point, Colombel had suggested lowering the cutoff point. Kusserow said Colombel then ordered a member of his staff to rate her application once more, then personally forwarded her file and the rating to the grants office.

But Kusserow said it was decided later to discard the rating system and simply award scholarships to every applicant who had a grade point average over 3.0.

In the other case, Sahmaunt, identified as a distant cousin of Rhoades and the daughter of a close friend, was awarded an IHS scholarship to the University of Oklahoma school of pharmacy in 1982, even though pharmacy had been classified as a nonpriority subject.

The report said Rhoades' only involvement in the award appeared to have been an inquiry to the scholarship office about the status of the application after the girl's mother phoned him about it.