The National Endowment for the Arts advisory council refused yesterday to recommend funding for a pair of grants that would support work by controversial performance artists Karen Finley and Holly Hughes.

The council withheld its approval on procedural grounds, effectively enabling NEA Chairman John Frohnmayer to sidestep a decision on funding artists targeted by the endowment's critics as a fight over NEA reauthorization looms in Congress.

Acting on a recommendation by Frohnmayer, the council made an apparently unprecedented decision to withhold approval of five grants in an experimental-art category because of a possible conflict of interest involving the panel that reviewed the applications. The advisory group backed Frohnmayer's proposal to submit the applications to a new review panel and reconsider the applications at the council's next meeting in November.

Hughes, who observed part of the meeting and left the room in tears, said the conflict-of-interest issue was "a bogus thing. They do not want to fund openly lesbian and gay art, art that deals with sexual politics."

The action also was denounced as "a complete sham" by Bobbi Tsumagari of the Kitchen, a New York organization that sponsored Finley's application. "The McCarthyism of the '90s has spread not only to Karen Finley, but to people who asssociate with Karen Finley. It's spread from Congress to the {NEA} council," she said.

The council also voted to approve two $40,000 grants to Philadelphia's Institute of Contemporary Art, which assembled the controversial Robert Mapplethorpe exhibit with NEA money.

At its last meeting in May, the council had recommended rejection of those applications, with some members arguing that funding the museum might appear to be a taunt to the endowment's critics in Congress. But at Frohnmayer's urging, the group reconsidered and the grants were approved unanimously yesterday.

That did little to mollify arts activists when the council turned to the grants for Finley and Hughes. As soon as Frohnmayer announced his proposal to withhold approval of those grants and three others on possible conflict-of-interest grounds, gay-rights activists disrupted the proceedings. About a dozen were carried from the room by police after a noisy protest.

Finley and Hughes were among four artists whose applications in the performance art category were rejected by Frohnmayer last month. Both had been singled out by endowment critics on grounds that their work is potentially offensive or obscene.

Both also had additional applications in an experimental interdisciplinary art category that came before the council yesterday after being approved by peer panels and staff.

Council discussion focused initially on whether the endowment should fund experimental art. Council member Harvey Lichtenstein, president of the Brooklyn Academy of Music, defended Finley after seeing her work recently at Lincoln Center.

"Yes, she smeared chocolate on her body," he said. "Yes, she put gelatin in her bra . . . The gelatin in her bra was actually very funny. But . . . she was a practiced artist. She was professional. She was adept. This wasn't amateur night and it wasn't Minsky's on 42nd St."

Council member Phyllis Berney, an arts patron, said she wondered whether some of the grants in the experimental category weren't "trash." Joseph Epstein, a professor at Northwestern University, argued that artists who want to make political statements "ought to go elsewhere" for funding.

Ultimately, the vote hinged on the fact that both Finley and Hughes have collaborators for their proposed projects who sat on the 13-member peer panel that reviewed their applications.

Such potential conflicts frequently arise on NEA panels and usual practice is for those panel members who might benefit from a grant to identify themselves and leave the room when their grant is under discussion.

M.K. Wegman, who headed the peer panel for both applications, said those procedures were followed and the panel was "extraordinarily diligent" about possible conflict of interest.

Frohnmayer emphasized that the panel "was properly constituted" and said he has "absolute confidence in the integrity" of the panel members. But he said the NEA faces "a problem of perception and a possible real conflict of interest" because its rules in this area are "inadequate."

The recommended grants that were not funded include $25,000 for the Kitchen gallery to fund a collaboration between Finley and musician Jerry Hunt, who was on the review panel. The work is described as "deconstruction of the television talk-show variety format."

Also rejected were $15,000 for Downtown Arts, which was to fund "No Trace of the Blonde," a work by Hughes and panelist Ellen Sebastian; $17,000 to the Arts Company in Cambridge, Mass., for new work by Belgian choreographer Wim Vandekeybus and $10,000 for Los Angeles Contemporary Exhibitions Inc. for a production called "Detour at Avenue Deja Vu."