Two years ago, C. McClain Haddow, then chief of staff of the Health and Human Services Department, embraced a small agency program that used a teddy bear character to encourage sick children to ward off infections by washing their hands.

Haddow and his boss, then-HHS Secretary Margaret M. Heckler, pumped more than $300,000 in federal funds into the program, sought donations from health industry executives and created a private group, the T. Bear Foundation, to promote the concept. Haddow was installed as its unpaid vice president, and the foundation, at Haddow's behest, soon hired a number of his friends and former aides.

The nonprofit foundation is now under investigation by the FBI, which is examining allegations of financial improprieties involving contractors and foundation officials. Foundation President Leonard L. Silverstein, citing his concern about the probe, said he requested and received Haddow's resignation Wednesday.

What began five years ago as an altruistic campaign with a cute and cuddly symbol has come to symbolize something else, the familiar Washington controversy about the sometimes blurred lines between public and private interest.

The private foundation raised $350,000 from health care companies last year, in addition to what HHS spent to promote the program. Yet the foundation has accomplished little, failed to launch its national hand-washing campaign and spent its entire budget on promotion, advertising, salaries, accounting, legal fees and overhead.

At Haddow's urging, the foundation hired two of his former assistants at HHS, his media consultant during two legislative campaigns in Utah and a Washington fund-raiser who has worked with him. Several of these associates, like Haddow, are from Utah and have worked for Sen. Orrin G. Hatch (R-Utah), one of the original directors of the T. Bear Foundation.

Haddow said the foundation's hiring of several of his former associates "looks bad. Looking back at it, in retrospect, it creates an appearance that I'm uncomfortable with, quite frankly . . . . It's an appearance problem."

But Haddow, who opened a Washington consulting firm in February, defended the program as "a labor of love" and said the allegations of financial impropriety are unfounded. He complained in his resignation letter of "an apparent attempt by some to use the foundation as a vehicle to criticize me personally."

Haddow's chief critic is Kathleen J. Robichaud, who created the program at the National Cancer Institute and remains on the foundation's board. In a lengthy memo to HHS last April, she said, "It appears that the T. Bear Foundation has become a small business that benefits everyone but the children in hospitals for whom the program was intended."

While the program was originally designed to give away promotional teddy bears to children's hospitals, the foundation is selling the bears at a profit. Robichaud called it "shocking" that the foundation has spent no money providing teddy bears or infection materials to children's hospitals.

Haddow was recently embroiled in a separate controversy when he became a consultant to International Medical Centers, Florida's largest prepaid health plan. The hiring came nine months after Haddow, while serving as acting director of the federal Medicare program, signed a waiver that could have brought the Florida company millions of dollars in new Medicare revenues. Haddow said he saw nothing wrong in working for the firm.

Haddow also began soliciting health care clients during his final months at HHS, an arrangement approved by department lawyers. After resigning Feb. 1, he worked as an HHS consultant for four months while starting up his new firm.

Heckler's successor at HHS, Secretary Otis R. Bowen, has dropped the T. Bear program from the department's budget. An HHS spokesman said Bowen supports the concept but "has other priorities. He felt it was not one of the priorities this department should be spending its time and resources on."

Executives from the Federation of American Hospitals and American Medical Association recently resigned from the foundation board. Hatch, who chairs the Senate committee that oversees HHS, also had his name removed, saying he was placed on the board through a misunderstanding.

HHS officials were unable to say exactly how much was spent on the program, and the inspector general is examining whether the department's funds were mishandled. The FBI probe is focusing on the private foundation, which was formed in September 1984.

Silverstein said he had been unaware of the investigations and asked for Haddow's resignation after being questioned about the probes by The Washington Post. He said he was concerned for the reputation of what he called "a total do-gooder project."

Silverstein, a Washington attorney, said he was "in a somewhat awkward spot" while Haddow was HHS chief of staff and also helping to run the foundation as vice president.

"Of course, there are people who were his buddies" and were hired by the foundation, Silverstein said. "But it seemed they had the abilities to do the job."

Those hired by the foundation at Haddow's request include:

Donna Black, who worked on the T. Bear program as Haddow's special assistant at HHS. "The reason he suggested me is because I knew the program," said Black, who previously worked for Hatch. "The work I've done here more than proves that I can stand on my own." Black is now acting executive director at $30,000 a year, but had previously agreed to stay for only three months.

Silverstein said Black has done a good job, although "we had some question about putting another one of Mac's Haddow's people to work in the foundation, just because Mac had proposed her."

Dana S. Kimball, who worked on the program as Haddow's special assistant at HHS. She became the foundation's secretary and was paid $8,409 for part-time work over nine months before resigning.

Mark Hurst, a Salt Lake City media consultant who worked on Haddow's 1980 and 1982 campaigns for the Utah legislature, and was brought in by Haddow to handle Hatch's 1982 Senate reelection.

Hurst's small advertising firm was paid $149,818 by the foundation to produce television and radio ads, posters and other promotional material. "Mac opened a door for us," Hurst said. "Obviously, I'd be a liar if I said Mac didn't make the suggestion to take a look at us."

Hurst said Haddow had previously helped him win an HHS contract involving another Heckler initiative on child support. On the T. Bear program, he said, he devised a marketing plan "to introduce a broader audience to a national spokesbear for clean hands."

Silverstein said it was "a little curious that we were using someone out of Utah" and that Hurst's hiring "was all fixed with Mac." Silverstein said he had questioned the need for a monthly retainer and had Hurst's firm switch to hourly billings.

Michelle Magoon, who once worked with Haddow on a conservative fund-raising dinner and now works for a firm run by Hatch's former administrative assistant. Her firm, Magoon and Associates, was paid $37,400 over 11 months to raise funds for the foundation.

"Mac produced her; he said he worked with her," Silverstein said. He said he had questioned "what we were getting for our $3,000 a month" retainer and that Magoon resigned under pressure last fall. Magoon could not be reached for comment.

The T. Bear program once aspired to nothing more than helping sick children treated at the National Institutes of Health. But by the time Haddow moved it into Heckler's office last year, there were plans for the costumed bear to visit the White House and for First Lady Nancy Reagan to present stuffed bears to a local children's hospital.

HHS licensed the foundation to use the government-owned logo, and Heckler signed a waiver for Haddow to serve on the foundation's board. Heckler, now ambassador to Ireland, is a director, as is former HHS deputy assistant secretary Glenna Crooks. White House press secretary James Brady is honorary chairman.

Robichaud, now back with the cancer institute, says T. Bear has become "a program that benefits Mr. Haddow and his friends." She has filed a grievance seeking a promotion within HHS so she can "restore the Teddy Bear program to its original intent."

Haddow replied that Robichaud "is waging a personal vendetta against me" and making unfounded charges because "we didn't let her run the thing." Haddow had brought Robichaud into Heckler's office to manage the program, but transferred her to another post after a series of disputes.

Asked about the foundation's sale of 14,000 teddy bears last year, Haddow said, "It was never intended that the program would deliver free bears." The foundation's plan is to design a national hand-washing campaign, he said, and "the materials would be handled on a local level, with pediatric hospitals and local do-gooder groups as sponsors."

Haddow said several erroneous allegations have been made against him. One, he said, is that he double-billed the government and the foundation for an official HHS trip last year to Cincinnati, where Haddow discussed the T. Bear program at a health industry convention. Haddow said the foundation issued him a $368 check for travel expenses, but that it was intended for his wife, who he said went with him as a last-minute substitute to speak on the foundation's behalf.

Haddow also said he had to negotiate with a former candidate for governor of Utah, who claimed trademark rights to a similar T. Bear character designed for children's books. Faced with lengthy litigation, the foundation is changing its name to the Scrubby Bear Foundation and must revise its promotional materials.