The former chief of a State Department office that promotes the Reagan administration's Central American policy has denied a government investigative agency's finding that his unit ran a "prohibited, covert domestic propaganda campaign" when he headed it.

Otto J. Reich, ex-head of the Office of Public Diplomacy for Latin America and the Caribbean, also declared in a recent interview that an internal memo suggesting the office planted stories in unsuspecting leading newspapers was "vastly exaggerated."

Reich, now U.S. ambassador to Venezuela, said the author of the March 1985 memo, former aide Johnathan Miller, has told Reich he was "just kidding" when he called the unit's activities "white propaganda." Reich said he had not authorized the memo, and was out of the country when it was prepared.

The General Accounting Office, the investigative arm of Congress, has concluded that when Reich was the unit's head, it engaged in "prohibited, covert propaganda activities."

The GAO said consultants paid by the office prepared articles for The Wall Street Journal, The New York Times and The Washington Post and attempted to have them published without revealing the authors' administration ties.

Reich denied using consultants to secretly write news articles, but said they prepared articles for the office as part of its efforts to promote the administration's support of the Nicaraguan contras and positions on other Central American issues.

Set up in 1983, the office's future is uncertain, with Congress in disagreement over whether to approve new funds and State Department budgeteers marking it for elimination in a new economy plan.

Interviewed during a visit to Washington, Reich also denied assertions by staff members of the House Iran-contra committee that Lt. Col. Oliver L. North, while a National Security Council aide, secretly helped direct the public diplomacy office in connection with North's private contra support network.

Reich said North was just one of several officials he consulted, but he worked for Secretary of State George P. Shultz.

Earlier this year, the State Department's inspector general criticized the awarding of more than $400,000 in noncompetitive contracts during Reich's tenure to International Business Communications (IBC), a firm headed by Richard R. Miller, a former Reagan campaign aide who has been tied to North's private contra support network.

Reich said North played no role in the IBC contracts decision, which he traced instead to a relationship his office had with former State Department official Frank Gomez, Miller's IBC partner. Reich said any contracting irregularities were unintentional and that he had relied on other State Department officials' assurances that the contracting steps were proper.

Johnathan Miller's memo to then-White House communications director Patrick J. Buchanan cited The Wall Street Journal's publication on its March 11, 1985, Op-Ed page of an article on Soviet military aid to Nicaragua by John F. Guilmartin Jr. Guilmartin, a college professor, at the time was a paid consultant to the public diplomacy office -- a fact not mentioned in the Journal article. Miller wrote that Guilmartin was a consultant and "collaborated with our staff in the writing of this piece . . . . Officially, this office had no role in its preparation."

According to internal State Department documents, Guilmartin was hired in December 1984 to "produce an article suitable for general distribution" on the military capabilities of Soviet helicopters supplied to Nicaragua. The records show that four days after his article was published in The Journal, Guilmartin wrote the State Department that his work was finished and asked for $500, his contract amount.

Reich said Guilmartin was hired to write an article for his office's public information use, and not to write the Journal article. Reich said that after Guilmartin completed his work for the public diplomacy office, Guilmartin received approval from other department officials to use some of the same information for the Journal article.

Department officials, asking anonymity, have said they believe the probes of the office are part of an effort by congressional opponents to discredit Reagan's overall Central American policy.

Reich criticized GAO for failing to question him about the issues cited in the report. He said the GAO has interviewed him about other aspects of the public diplomacy office's operations.

GAO General Counsel Harry Van Cleve said the agency did not interview Reich on the propaganda issue because it had discussed the matter with the office's current chief. Van Cleve said the GAO report did not say Reich himself had engaged in the questionable actions, which took place during his tenure.

Van Cleve said GAO will issue a later report looking at the office's contracting policies under Reich.

The GAO inquiry was requested by Reps. Jack Brooks (D-Tex.), chairman of the House Government Operations Committee, and Dante B. Fascell (D-Fla.), chairman of the House Foreign Affairs Committee. Both are also members of the House Iran-contra committee.

Brooks in a statement said "this illegal operation represented an important cog in the administration's effort to manipulate public opinion and congressional action."