The D.C. Council rejected a proposed 2 percent pay increase yesterday for 24,000 city government employees in an unusual move that members said was necessitated by the District's worsening fiscal crisis.

This was the first time the council has rejected a pay increase negotiated by the Barry administration and will save the cash-strapped District $31 million this year, according to estimates by city officials.

"We don't have any money, period . . . . We're broke," said council member John A. Wilson (D-Ward 2), the chairman-elect and sponsor of the proposal to reject the raises. "It is totally impossible to finance any kind of pay increase at this time."

Wilson warned his colleagues that unless the city begins to address its fiscal problems, the federal government will step in to limit home rule and "send us an overseer to tell us what we can do or can't do."

The council's move, on two voice votes, is likely to precipitate a confrontation with organized labor at a time when the city needs to enlist union cooperation in trying to close a projected $100 million to $200 million budget deficit in the current fiscal year.

Negotiators for the city and unions representing 15,000 blue- and white-collar workers agreed recently to the 2 percent pay increase -- plus a 1 percent Christmas bonus -- as part of a one-year wage settlement considered relatively modest by both sides. Barry subsequently proposed a similar package for 9,000 nonunion workers.

With yesterday's action, however, the council essentially sent the union package back for renegotiation. If the city and the unions fail to reach agreement, an arbitrator possibly could order the city to accept a more expensive round of salary increases.

"I'm very disappointed, because this was a financially responsible settlement," said Mark Levitt, the administration's top labor negotiator. He said that Philadelphia, which is experiencing serious financial problems, recently agreed to a 6 percent worker pay raise, while Metro granted its employees a 4.5 percent increase.

Speaking with reporters as the council met yesterday, Barry was even more critical of the council's action. "This is just the beginning of a frontal assault on D.C. government employees," he said. "D.C. government employees, both union and nonunion, deserve these pay increases."

Union officials also expressed outrage. "It was a great deal for the city," said Rusty J. Hassan, an official with the American Federation of Government Employees. "It {the council rejection} really wreaks havoc on the collective-bargaining project."

Funds for the proposed pay raise were not included in the fiscal 1991 budget approved last spring by Barry and the council, but Barry had proposed that city agencies absorb the cost of the pay increase by cutting other parts of their budgets.

Mayor-Elect Sharon Pratt Dixon will inherit the pay-raise controversy when she takes office Jan. 2.

Already, the city is facing a $100 million shortfall in projected tax revenue, as well as continued overspending in the departments of corrections and human services. On top of that, the budget for 1991 does not include funds for another set of expected pay increases for police officers, firefighters, doctors, nurses and teachers, increases which could cost an additional $30 million or more.

Union leaders said they were told by Dixon during her campaign that she supports pay increases for city workers, but she declined to comment yesterday on the council's action.

She said in a statement that she would "express her concerns relating to the urgent need to balance the city's budget" after a meeting with Barry set for today.

Several council members indicated that they expect to see pay increases for workers submitted by Dixon early next year as part of her overall financial package, including details on how she plans to pay for them.

"The pay increase for workers is not very much," said William Lightfoot (I-At Large). "They deserve a pay increase."

But John Ray (D-At Large), who was defeated by Dixon during the Democratic mayoral primary, said that not receiving pay increases may be the price city workers must pay as part of solving the city's financial crisis. "It is a question of no pay raise or no work," he said.