Flaws in the federal inspection process allow millions of chickens tainted with fecal matter and other disease-inducing germs to reach American consumers each year, a top Agriculture Department official acknowledged yesterday.

Donald L. Houston, head of the Food Safety and Inspection Service (FSIS), said a proposed new system of random testing for salmonella disease should replace the current bird-by-bird visual inspections at processing plants because "we're not assisting the public health."

A National Academy of Sciences panel recommended last month that the USDA switch from the visual system to more sophisticated monitoring techniques to prevent microbial contamination that causes several million cases of food poisoning annually.

At a House subcommittee hearing, two NAS panel members said current slaughter and inspection procedures do little to ensure public health protection and, in fact, may increase potential for disease through cross-contamination during processing.

"We find no evidence that bird-by-bird inspection is doing anything to protect the public health," panelist John C. Bailar III said.

Colleague J. Glenn Morris of the University of Maryland School of Medicine said "the reality . . . is that 60 to 70 percent of the chickens may carry one or both" of the common salmonella and campylobacter disease microorganisms.

Houston, university scientists and representatives of the broiler industry, which yearly sends more than 4 billion birds to market, argued strongly that the FSIS should be allowed to adopt random sampling for contamination as soon as testing technology is refined.

Houston, however, said budget restraints would not allow the USDA to perform both kinds of monitoring. If the department moves to a sampling system, he said, the poultry industry would be responsible for visual surveillance -- financed by taxpayers since inspections began 30 years ago.

Others, including legislators and consumer and labor spokesmen, agreed that random sampling would help but contended that federal regulatory sloppiness and processing-plant mechanization have impeded the effectiveness of bird-by-bird inspections and endangered public health.

In a brisk exchange with Houston, Rep. Neal Smith (D-Iowa), a longtime advocate of tougher inspections, charged that the FSIS has violated the law by allowing contaminated bird carcasses and parts to enter the retail chain after washing.

Smith painted a grim picture of slaughter plants and mechanical evisceration devices spreading fecal contamination by breaking open birds' intestines as they speed down processing lines. He argued that tighter visual inspection is the only safeguard against sending poultry to market with "cancers or lesions or pus sacs."

Houston said washing is sufficient to clear the product for sale, but Smith said he is "really amazed that you use that excuse . . . so I'd say you definitely are violating the law."

Houston responded, "We believe we have operated strictly to the letter of the law."

Carol Tucker Foreman, an assistant agriculture secretary in the Carter administration, said that before sophisticated testing is adopted, Congress should require the USDA to crack down on plant sanitation and halt what she called "germ warfare" being waged against consumers.

"Keep feces off the chickens, and you'll cut the number of bellyaches and more serious illnesses that result from contamination," Foreman said, adding: "Waste excreted from the bowels of chickens that then comes in contact with edible tissue is the single most important source of salmonella contamination, according to the NAS."