Federal Aviation Administration chief Donald D. Engen, seeking to blunt criticism that his agency is poorly equipped to guarantee airline safety, told Congress yesterday that the FAA has made "tremendous strides" toward meeting the challenges posed by airline deregulation.

"The whole world believes we're not doing our job," Engen said. "That's false and misleading and tends to tear the moral fiber of our inspection effort . . . . We're doing the best we can."

Engen's testimony came in the third day of hearings before the House Public Works subcommittee on aviation and followed, by a week, a General Accounting Office statement that the FAA "cannot say with assurance that airlines are complying with safety regulations."

He outlined a series of management actions the FAA has taken in the past two years to attack its admitted shortage in safety inspectors. More inspectors are being hired, he said, but the FAA must compete with expanding airlines for people with the same qualifications, and the attrition rate has been higher than hoped.

Engen said that the deregulation of airline routes and fares in 1978 brought about rapid growth and changes in the industry that the FAA was slow to recognize. The fact that some airlines were not as particular about following safety regulations as they had been in the past came to light after an "unfortunate accident in 1983," he said.

He was referring to the crash of an Air Illinois flight near Pinckneyville, Ill., in which 10 people died. The National Transportation Safety Board's investigation found a pilot who knowingly tried to continue the flight instead of returning to an airport after the plane's generators failed and an airline with a long list of maintenance problems, some occurring under the nose of an FAA inspector.

That set off a series of inspections and led to a revamping of the FAA approach to monitoring airlines. "It is not possible to totally restructure a system in two years," Engen said. "We have made tremendous strides. But we are not yet where we need to be."

He said that the FAA is working to standardize inspection procedures and enforcement actions nationwide, instead of permitting each FAA regional office to go its own way, and is busily rewriting inspector handbooks and improving inspector training.

Rep. Norman Y. Mineta (D-Calif.), subcommittee chairman, asked Engen if the FAA has abandoned its "cooperative attitude" toward the airlines, as Eastern Air Lines Chairman Frank Borman charged after the FAA proposed a $9.5 million civil penalty against Eastern for alleged safety violations.

"There's been no attitudinal change . . . ," Engen said. "Any perception they might have might be based on the fact we are enforcing regulations in ways not done in the past. Previously, attorneys for the FAA and the airlines would sit together and work it out . I said no" to that practice.

He said the FAA assesses "fair and equitable" penalties, gives airlines an opportunity to rebut allegations and present evidence, then expects penalties to be paid. Eastern refused to pay its proposed fine and the FAA referred the matter to the Justice Department.