The National Science Foundation admitted yesterday, in out-of-court settlement papers, that it was wrong 10 years ago when it spread a rumor that a geologist applying for a grant was a CIA agent, and it officially apologized to him.

The NSF said it relayed the rumor, which it now acknowledges as false, to outside scientists who were asked to evaluate the geologist's application. The application was rejected. The foundation said that while some reviewers conceded that the rumor affected their views of the geologist, the application was rejected only because it lacked sufficient scientific merit.

The admission and apology are contained in papers filed yesterday in U.S. District Court here in which NSF and the geologist, Jon Kalb, settled a lawsuit filed last December on Kalb's behalf by Public Citizen Litigation Group, the Ralph Nader-affiliated organization. As part of the settlement, NSF will pay Kalb $20,000 for attorneys' fees.

Shortly after the grant proposal was rejected in 1977, Kalb was expelled from Ethiopia, where he is said to have been doing research on sites where early human ancestors lived. The settlement agreement, signed by both parties, says rumors about Kalb and the CIA had been circulating in Ethiopia since 1974. Kalb's lawsuit contends he was not expelled until shortly after NSF's circulation of the rumors.

Kalb is known to several anthropologists who study human evolution in Africa. Donald C. Johanson, the American anthropologist who discovered many ancient human fossils in Ethiopia, recounted in his book "Lucy," that in 1974 Kalb, who had been living in Ethiopia for several years, tried to prevent Johanson and his team from working there. Johanson had made major discoveries in the same region Kalb had been exploring for some years.

According to Johanson's book, Kalb tried unsuccessfully to persuade the Ethiopian government to bar Johanson's team from working there on grounds of professional incompetence.

Kalb claims no major scientific credentials. Although he has published some articles on Ethiopian geology and fossils, he has no PhD and said his scientific work has "fallen off" because of time devoted to battling the NSF. He has an unpaid position as a research associate at the Texas Memorial Museum, operated by the University of Texas at Austin, where he works with animal fossils collected in Ethiopia.

According to Kalb's suit, the CIA rumor reached NSF when the foundation sent Kalb's grant request to several outside scientists for review, a standard practice. One of the reviewers was Glynn Isaac of the University of California at Berkeley, a major figure in human evolution research in Kenya.

According to Kalb, Isaac wrote to NSF, passing on the rumor and NSF officials relayed it to the other members of the review panel. Isaac has since died.

"NSF does not believe," the settlement agreement states, "the allegation that Mr. Kalb is or ever has been associated with the CIA . . . . NSF firmly believes that the rumor has no basis in fact."

The agreement also says, "NSF did not intend to give the rumor credence or to harm Mr. Kalb's reputation . . . . NSF apologizes to Mr. Kalb if panel members and others misinterpreted its action as an endorsement of the accuracy of the CIA rumor and if the rumor therefore played a role in the evaluation of the proposals."NSF also apologized for having previously denied that the rumors were a factor in turning down the request.

"While I am satisfied with NSF's apology to me," Kalb said in a statement issued by his lawyer, "there are many others who have needlessly suffered because of NSF's actions, particularly my Ethiopian associates who have been repeatedly harassed as a result of the CIA charges.

"I am also concerned that NSF grant applicants remain unprotected from slanderous personal allegations introduced in the peer review process."