After federal officials suspended a $14 million contract on Tuesday with the Harvard Institute for International Development (HIID), one of Harvard's most prestigious think tanks has found itself embroiled in a legal and political battle that spans two continents.

The contract was the last installment of a $57 million grant HIID received from the U.S. Agency for International Development (USAID), an independent government agency that promotes U.S. interests through assistance to other countries. The grant funded a project, directed by Professor of Economics Andrei Shleifer, which promoted Russian development.

In a letter to HIID Director Jeffrey Sachs, USAID alleged that Shleifer and Jonathan R. Hay, the project's director in Moscow, "abused the trust of the United States government by using personal relationships, on occasion, for private gain."

Shleifer, who said that he was "surprised at the attention that this has received," added that the allegations were unfounded.

A preliminary investigation by USAID's inspector general's office found two specific areas of possible impropriety, said Donald L. Pressley, deputy assistant administrator of USAID.

Hay is accused of using information obtained through his close work with Russian officials to profit from investment in Russian markets. The letter stated that Moscow officials had confirmed that Hay did have Russian investments.

"[Hay and Shleifer] are key advisers. They are close confidants of the Russian government," Pressly said.

USAID's preliminary investigation also found that Hay "has used resources financed by USAID to support the private investment activities" of Shleifer's wife, Nancy Zimmerman, with his knowledge, the letter alleged.

The letter accuses Hay and Shleifer of using support staff to do the following for Zimmerman: "Buying and selling Russian bonds, tracking deposits and withdrawals from the investments' Russian bank accounts, consulting about tax aspects of the investments and possible additional investment opportunities."

The letter is "wrong in its conclu- sions, wrong in its assumptions and inaccurate in its facts and foolish in its rhetoric," said Michael F. Butler '57, a Washington lawyer who represents Shleifer and Hay, in a written statement.

Hay, who works in Moscow, could not be reached for comment, though sources said yesterday that he had resigned recently from HIID.

In the statement, Butler said that Hay and Shleifer had carefully followed all the government's rules. He also painted a complex picture of Zimmerman's Russian activities, one that he said was completely legal.

He said that Zimmerman paid for her investment advice from the Institute for a Law Based Economy-Consulting, a for-profit subsidiary of HIID's Russia project.

"[Zimmerman] is saying that ILBE-Consulting gave her advice, but we do not accept that position," Pressly said. "We think USAID financed the resources being used by her."

Pressly said that USAID is now trying to piece together a "fuller understanding" of HIID's Russian activities. They are presently awaiting responses from HIID, the Russian government and the perople involved.

No criminal or civil charges have been brought against Shleifer, Hay or Zimmerman, but USAID's investigation is ongoing, Pressly said.

University spokesperson Joe Wrinn said that the University had been cooperating with USAID investigators for about six weeks.

"HIID takes extremely seriously any allegations of impropriety of any individuals associated with HIID," read a University press release. "HIID is cooperating fully and actively with USAID in their continuing investigation of this matter."

Janine R. Wedel, an associate professor at George Washington University who is working on a book about U.S. aid to Eastern Europe and Russia, said HIID has unusual influence in Russia.

"HIID is a unique position to recommend U.S. aid policy in support of reform, while at the same time being a recipient of the aid as well as overseeing other aid contracts," Wedel said.

Officials said HIID is being caught in a political showdown. Shleifer said he was being unfairly targeted, adding that he was caught "in the middle of a battle between Russian politicians."

HIID's activities are closely aligned with Anatoly Chubais, who served as Boris N. Yeltsin's first deputy prime minister until he was fired last year and placed on Harvard's payroll briefly, Wedel said.

Sachs is currently in Malawi and could not be reached for comment