THE REAGAN Administration's insistence on military intervention in Nicaragua is leading to disaster. The administration's stated aim is to topple the Nicaraguan government, but in the single-minded pursuit of that goal the U.S. government is ignoring opportunities for a peaceful resolution of the tensions in Central America.

Secretary of State George C. Shultz described the Sandinista administration last December as "a cancer in Central America that has got to be removed." To do this the Reagan Administration is seeking $100 million in military and economic aid to foot the bills of the Nicaraguan Contras as they wage war against the government. Military support, the administration claims, is the only alternative to the direct involvement of North American troops.

This military assistance is no assurance that the Contras will be successful. The Contra army of terrified peasants and ex-Somocista national guardsmen has created economic havoc for the Sandinistas but are far from causing their removal. For the last six years under the auspices of the CIA and the Argentine military, Contras have bombed ports, bridges, and petroleum tanks. But in spite of these measures, they have not captured a single town in the country. Their two-year-old front along Nicaragua's Southern border has collapsed, and most of the 15,000 guerillas have scattered in retreat.

One reason for the Contras' lack of popularity in Nicaragua is evident in a variety of documented reports of atrocities committed against unarmed civilians. The rebels are considered by many Nicaraguans to be a terrorist army left over from the old Somoza regime.

Reagan is counting on these rebels--whom he likens to our "Founding Fathers"--to protect the Western world from Communist infiltration. If they fail, well, what then? American taxpayers may be able to donate both their dollars and their children to the Contra cause.

THE TRAGEDY OF the administration's position is that a policy of non-negotiation is not the only approach to the Nicaraguan situation. The Contadora group--Mexico, Colombia, Panama, and Venezuela--has recently resurfaced after a period of inactivity to offer a plausible alternative to this brutal approach. Ministers from the four Contadora nations met last month with officials from Brazil, Argentina, Peru, and Uruguay to issue a joint statement calling for a negotiated settlement to the Nicaraguan war.

The Latin American nations' call for increased dialogue and decreased reliance on military methods is their remedy for mounting tensions in the war-torn region. Specifically, they encouraged the resumption of talks between Washington and Managua that were cut off in 1984. They also endorsed the removal from Central America of foreign advisors and military bases and offered guarantees for the establishment of democratic governments, addressing two of the Reagan Administration's major complaints about the Sandinistas.

The Contadora plan has been criticized for lacking firm provisions guaranteeing a pluralistic government and the security of human rights. Washington is in a position to revise and strengthen the program. The Contadora nations have asked Washington to work with them to further the prospect of a democratic future for Central America.

But, once again, the U.S. government is inflexible to reasonable compromise where Central America is concerned. The Latin American ministers met with a cool response from Shultz last month in Washington. The Reagan Administration refuses to alter its unremitting campaign against Nicaragua. As one leading official is reported to have said, "Contadora's document of objectives includes pluralism, democracy, and reconciliation. How do you get the Sandinist Communists to agree with that? The answer seems to me clear, and it is pressure." Military pressure, of course.

Congress is in a position to change this short-sighted policy. It can go one step further than merely considering the proposed funding and demand an end to this country's illegal and disgraceful military involvement in Nicaragua. With an endorsement of the Contadora initiative, Congress can tell the White House: no negotiation, no compromise, no aid.

BY DENYING the Contadora group full support, Washington is putting the countries of Central America in a position where they have to choose between the friendship of the Northern power or of a Central American neighbor. Contadora will never resolve the Nicaraguan conflict without active U.S. participation. The Reagan Administration has steadfastly ignored Contadora's objectives: peace, democracy and stability, in both the long and short term. It is up to Congress to incorporate these goals into U.S. policy.