The White House said yesterday it would review the Education Department's decision to bar most colleges from awarding scholarships based on race as business groups joined education and civil rights groups in criticizing it.

But senior administration officials, who said they were not told in advance of the decision, were divided over whether to rescind the regulations, and a senior staff meeting yesterday morning was unusually contentious.

"There was serious hysteria here," one official said. "People saying, 'We gotta back off this now,' and others saying, 'Wait a minute, this is not at odds with our policy,' and everyone saying, 'What are the facts? We don't know the facts.' "

The internal debate mirrors a broader question facing the administration and the Republican Party. At issue is whether to extend the party's opposition to hiring quotas, reflected in President Bush's veto of the 1990 Civil Rights Act, into a broader attack on federal policies and programs that encourage or require special treatment for minorities.

In this case, the decision that "race-exclusive" scholarships are discriminatory and in violation of the Civil Rights Act of 1964 was made by Michael L. Williams, an assistant secretary of education, without consulting the White House. A department spokesman, Etta Fielek, said yesterday Williams's decision had been reviewed beforehand by department counsel Edward C. Stringer and Education Secretary Lauro F. Cavazos, who resigned Wednesday under pressure from the White House unrelated to the scholarship decision.

White House Chief of Staff John H. Sununu, sources said, has ordered a review of the decision, and C. Boyden Gray, the White House counsel, will assess the legal case history. Some senior officials made no secret of their desire to avoid the issue, but as one official put it: "Williams has forced this issue, set it up, and now it is going to be

much harder to avoid it if we want to."

Sources said the Education Department had not been directed either to continue or halt action based on the policy. "We haven't told them anything yet except we should have known about this before," said one official.

Joining critics of the new policy yesterday were the U.S. Chamber of Commerce and the Council on Competitiveness, which urged the department to reconsider the policy in light of population trends that indicate a national need to educate more minority professionals in the coming years.

"Our competitiveness depends on it," said Daniel Burton, executive vice president of the council, a coalition of business, education and labor leaders.

Robert Martin, who directs the chamber's Center for Workforce Preparation and Quality Education, said that because the country has

in the past targeted education assistance to meet shortages of teachers and engineers, "It's not illogical to extend that to provide better representation of minority individuals."

At a news conference Wednesday, Williams said his decision to reinterpret regulations that date to the Civil Rights Act of 1964 was based on a Supreme Court decision last year that held that the city of Richmond could not reserve 30 percent of construction contracts for minorities.

"That case gave us some real guidance on what the law is as it

relates to voluntary affirmative

action. So we take our guidance

from the court and the law," he said.

Williams did not explain how the case concerning contractual set-asides related to college scholarships, and a department spokesman said neither he nor any other official was available to amplify his legal rationale. The House Education and Labor Committee scheduled a hearing next week on his ruling.

The decision grew out of unsolicited advice Williams had last week for organizers of the Fiesta Bowl football game. Williams said they could not give the University of Louisville and University of Alabama, which will play in the bowl New Year's Day, $200,000 to award as scholarships for minority students only. But, he said, the Fiesta Bowl itself, which receives no federal funds, could award such "race exclusive" scholarships, Williams said.

In general, Williams was relying on the Civil Rights Restoration Act of 1988, which was passed over President Ronald Reagan's veto. The law says a college accepting federal funds may not discriminate in any of its programs, even if they are privately funded.

"The source of the funding is irrelevant," Williams said after sending a letter to Fiesta Bowl organizers last week.

Many public and private colleges have scholarships designated for minorities. Columbia University has a program for minority students begun in 1987 with a gift from John Kluge, the Metromedia executive. St. Louis University began offering 25 scholarships for black students this fall, and Washington University said it has six merit-based programs that aid 50 minority students.

William H. Danforth, Washington's chancellor, said yesterday the school would continue the programs because "we have a commitment to those students" and the Education Department has issued no regulation, proposed or final.

Several states, including Iowa, New Mexico and Florida, also fund scholarships for minority students.

"We now have certain states that have special financial aid programs for minorities. I wonder how they're going to rule on that?" said Richard F. Rosser, president of the National Association of Independent Colleges and Universities. "This is really a complex mess."

Elizabeth Sweeney, Florida's administrator of student assistance programs, said the legislature has funded special scholarships for Seminole Miccosukee Indians, students "of Hispanic culture," minority law students at the University of Florida and Florida State University, and minorities who attend one of four historically black colleges in the state.

The Florida Department of

Education, where Sweeney works and which administers a variety

of federal programs, also awards

$150 scholarships from a private trust fund to descendants of Confederate Army or Navy veterans. She said those scholarships were not discriminatory because "there were some black Confederate soldiers."