The D.C. Council voted yesterday to end the city's policy of providing unlimited shelter and assistance to the city's homeless, while a congressional panel heard testimony about how the District has spent millions of dollars on dilapidated and overpriced temporary housing for the homeless.

The tentative council action alters a 1984 initiative guaranteeing overnight shelter for homeless people who request it. The cost of providing shelter has significantly escalated and critics say it has become a major drain on the city's resources.

The bill approved yesterday on a voice vote would authorize the city to restrict annual spending for shelter, limit the number of nights individuals and families could stay at the shelters and require those with money to help defray the cost of finding permanent housing for themselves. Final approval for the bill is expected this month.

Activists for the homeless, who marched about 50 adults and children into the council chambers, sharply criticized the council for drastically altering what had been one of the most generous municipal policies for the homeless in the country.

"I am really gravely concerned about it," said Susie Sinclair-Smith, director of The Washington Legal Clinic for the Homeless. "I think we're going to end up with a lot more people on the street."

Council member H.R. Crawford (D-Ward 7), author of the measure, said that while "it is no panacea," the council action "takes us a long way toward" stemming the spiraling cost of sheltering the homeless.

Meanwhile, a House Government Operations subcommittee heard allegations that through favoritism, the District has paid millions of dollars to operators of homeless shelters with political or personal ties to Mayor Marion Barry -- in some cases spending more than $2,500 a month for a dilapidated apartment or hotel room.

Rep. Ted Weiss (D-N.Y.), chairman of the subcommittee, criticized the District's approval of major contracts with at least four Barry associates who operate shelters for the homeless, including businessmen Ernest Green and James Griffin, who contributed to Barry's 1986 mayoral campaign. Both obtained contracts to rent apartments to the homeless in the past year.

The other two have long been associated with the District's troubled homeless programs: Cornelius C. Pitts Sr., owner of the Pitts Motor Hotel, one of the city's best known hotel shelters, and Roy Littlejohn, a city contractor who has housed the homeless in apartments for three years.

For several years, Pitts was paid $7,000 a month for temporary office space for social workers at his hotel, an amount that the D.C. auditor has cited as "inconsistent with the actual value of the services."

Weiss accused D.C. officials of showing favoritism by awarding some previous contracts without competitive bidding. He called the city's handling of homeless programs "a shocking situation -- shocking, because we're faced with a problem of enormous dimensions and a constant shortage of monies."

"A child of 12 can plainly see the gross pattern of favoritism that is involved" in awarding contracts, he said. "And God knows what else is involved."

City Administrator Carol B. Thompson disputed Weiss's allegation, saying it was "based on incomplete and inaccurate information." Thompson later issued a statement saying that the latest round of city contracts for the homeless, including those awarded to Griffin and Green, "were a result of competitive bidding. From that process, 18 contracts were awarded to nonprofit {contractors} and only six to for-profit firms. This does not show a pattern of favoritism."

"We are changing the system," Thompson told Weiss. "Maybe not as fast as you like."

Three of the four contractors whom Weiss cited declined to testify before the subcommittee yesterday. Barry's office did not respond to telephone calls regarding the hearing.

Griffin, the one contractor who did testify, said he had won his contract by offering "quality service," and not by exercising political influence. Griffin served on Barry's 1986 campaign finance committee. He began operating a homeless shelter last year.

Griffin said he operates two 45-unit apartment buildings, one on Chapin Street NW and and one on Park Street, as homeless shelters. He leases the buildings at a monthly cost of about $400 per unit; his contract with the District pays him about $2,800 per unit. As part of his agreement, Griffin provides counseling for the buildings' 90 families and pays for upkeep of the buildings.

Subcommittee investigators found that Griffin's apartments "were the most homelike and attractive" of all the shelters they visited, saying they were "furnished like an attractive new condo." But investigators estimated that if the apartments were rented on the open market they would bring between $600 and $1,200 a month.

The city's homeless program, mandated by the voter-approved Initiative 17, has been sharply criticized by Crawford and others for wasting money and adding to the District's mounting fiscal problems.

Crawford said the city is expected to spend $40 million on the homeless this year, or $15 million more than originally budgeted.

The cost of implementing the law has nearly tripled, from $10 million in fiscal 1985 to $27 million in fiscal 1988.

Following an often heated three-hour debate, the council gave preliminary approval to a measure that would set an annual limit on spending for the homeless. If the budget is exhausted, the mayor would have the discretion to shift funds to it from other areas -- but there would be no requirement to do so.

The measure also would require homeless people who have jobs or receive public assistance to pay up to 30 percent of their income to the city. An amendment approved yesterday stipulates that the money will be placed in escrow and will be used to help those homeless people find permanent housing.

The council action also would limit how long homeless people could remain in a city-funded shelter. Single people could stay for no more than 30 days and families could remain for a maximum of 90 days. Currently, the average stay in shelters is 44 days, but some have lived in shelters for two years.

Under the bill, the mayor would appoint a shelter program coordinator to screen applicants and steer them to mental health and drug counseling services if needed, as well as try to find them affordable housing.

The measure is expected to win final approval in two weeks, although some council members and advocates for the homeless said they will push for additional amendments.

Anita Bellamy Shelton, executive director of the D.C. Mental Health Association, said the children of homeless adults would suffer most if the plan is approved.

"I think they skirted the real issue of trying to protect the interest of children," she said.

Some council members complained that the bill contains no provisions to cut management waste, which advocates of the homeless say is a major factor in rising costs.

Council Chairman David A. Clarke (D) said that while homeless services would be scaled back under Crawford's plan, contracts to shelter and hotel providers would remain constant.

Clarke failed to win approval of an amendment to separate amounts spent for social services and contracts. "The money is not all being spent for the homeless," Clarke said. "We should just as well recognize that there are people taking this city for a ride."