March 16, 1983

The imbroglio over withholding Federal income taxes from interest and dividend payments, which has delayed the emergency recession relief bill now being debated by the Senate, threatens to create some nasty political fallout for the nation's financial institutions. These institutions - commercial banks, mutual savings banks, savings and loan associations and credit unions - have been leading the fight against the withholding law, and angering some members of Congress in the process. It is too early to predict the reaction of Congress to the industry's intense lobbying tactics, which have drawn criticism even from President Reagan. The whole affair might blow over. On the other hand, Congress could impose new regulations on the institutions or mandate a significant increase in their Federal taxes. Commercial banks and thrift institutions now enjoy important tax advantages, while credit unions are entirely tax-exempt.

IF New York City is the nation's most prolific garden of theater, literature, fashion and art, then certain restaurants here might be described as its fertile seedbeds, especially at lunchtime. At midday in any of these establishments - the Russian Tea Room, the Four Seasons, the Odeon, La Grenouille and Les Pleiades are just a few of them - ideas are germinated, connections made and fees settled that result in new plays, books, clothes and exhibitions. The current Broadway hit play ''Torch Song Trilogy,'' for example, had its genesis at Sardi's when the producer Kenneth Waissman bumped into the author, Harvey Fierstein, there during lunch. Another chance meeting there led to production of one of Mr. Waissman's earlier plays, ''Over Here,'' starring the Andrews Sisters. Just how a restaurant becomes the in place for a profession is often a mysterious process. Proximity to particular offices has something to do with it. So does the personality of the proprietor, who may bestow special favors on regulars. The ambiance is important and, perhaps lastly, the food.

Sometimes Israel and P.L.O. cooperate, discreetly A2 British present budget that casts doubt on election this year A3 Two new Grand Rabbis are chosen in Israel A4 U.S. and Dutch bid Soviet show flexibility on missiles A7 Compromise is proposed in East- West talks in Madrid A8 Around the World A9 Chun spares two doomed in South Korean arson case A10 Latin bishops see threat from fundamentalist sects A11 An American tells of year he spent with Salvadoran rebels A12 Government/Politics Miss O'Connor takes early lead in San Diego mayoral election A19 Attorney General defends agen- cy's handling of Burford case A20 Henry Stern looks forward to being Parks Commissioner B2 Prisoners held for serious crimes may have to be freed, aide says B4 City is collecting more sales and income taxes than expected B4 Assembly blocking Cuomo's plan on Appeals Court judges B8 Washington Talk Briefing A24 A time of change for the Smithso- nian Institution A24 Holocaust survivors and families to meet in capital A24 General Around the Nation A16 Strike affects 50,000 commuters in Philadelphia area A16 Racial tension high in Montgom- ery after incident A16 Two rescue unconscious man from Hudson River B4 News Analysis John Vinocur assesses effects of the French election A3 The Living Section Food The in lunch spots C1 It's time for spring lamb C1 Nutrition and the mother-to-be C1 The 60-Minute Gourmet C3 Margaux, a wine once unloved, is recovering C3 Food Notes C9 Wine Talk C14 Living Metropolitan Diary C2 Kitchen Equipment C2 A benefit for Meals on Wheels C11 Discoveries C12 Personal Health C16 Arts/Entertainment Jean Maheu settles in as head of the Beaubourg in Paris C21 ''Wizard of Oz'' on television again Friday C21 Pop Life: Hall and Oates on a winning streak C22 Hamburg Ballet performs ''A Midsummer Night's Dream'' C22 Merce Cunningham Company opens a season at City Center C26 Charles Abbott stars in ''Where's Charley?'' C26 Jack McCarthy to announce his 35th St. Patrick's Day Parade C27 Health/Science Meteorite from Antarctica identi- fied as Moon rock A13 Court orders end to delays in U.S. rules on ethylene oxide A21 Obituaries Dr. Clarke Williams, nuclear physicist B7 Sports Pages Knicks defeat Hawks, 119-97 B9 Fordham is beaten in N.I.T. B9 Princeton advances in N.C.A.A. B9 St. John's women are winners, too B9 Nets defeat Pistons, 109-90 B10 George Vecsey on a nation of sports fans B11 Features/Notes New York Day by Day B2 About New York B4 Sports People B10 Going Out Guide C25 (B2:1.) Editorials/Letters/Op-Ed Editorials A26 Wasting executive privilege The banks discredited The sixth deadly sin Letters A26 Russell Baker: The crank at the bank A27 James Reston: Reagan's policy and politics A27 Richard N. Holwill: Reagan, don't run until 1984 A27 Amnon Kapeliuk: Yasir Arafat's open door A27

As schools, bands and individuals grappled with whether to attend the St. Patrick's Day Parade tomorrow, former Gov. Hugh L. Carey said yesterday that he would try to organize a movement of Americans in favor of a peaceful solution to the strife in Northern Ireland. ''This won't be a dead story the day after the parade,'' Mr. Carey said of the furor that developed after organizations in the parade elected a supporter of the Irish Republican Army, Michael Flannery, as grand marshal. ''This is going to continue.''

A Reuters dispatch in Business Day on March 8 incorrectly described an agreement to build a hotel and casino in New Jersey. A new company is to be formed and Southern Sun Hotel Holdings Ltd. of South Africa is to contribute $40 million in cash for a 60 percent interest. The American Leisure Corporation is to contribute 8.2 acres of land in the Atlantic City marina area, plus related plans, licenses and permits, for a 40 percent interest.