BY GLENN GARVIN

 MANAGUA -- A smoldering political feud that burst into flames earlier this month
 with the arrest of Comptroller General Agustin Jarquin on fraud charges is
 threatening billions of dollars in foreign aid and debt relief for Nicaragua.

 The European Union, together with Norway and Switzerland, has threatened to
 kick Nicaragua out of a program that would chop nearly $5 billion off its foreign
 debt unless criminal charges against Jarquin are dismissed.

 The charges against Jarquin are an insult to ``the majesty of the law, to
 transparency, and to the respect for the independence of democratic institutions,''
 the European countries said in a statement made public by their embassies here,
 and added: ``As long-time friends of Nicaragua, we sincerely hope that the
 government takes note of our profound worries.''

 If the European governments make good on their threats -- and many officials here
 believe they will -- the result will be financial catastrophe for Nicaragua.

 Servicing the $6 billion foreign debt would cost an overwhelming 40 percent of
 Nicaragua's export income. ``We would go practically back into the Stone Age if
 we had to pay that,'' said one Nicaraguan official.

 Jarquin, a longtime bitter political foe of Nicaraguan President Arnoldo Aleman,
 was arrested Nov. 10 after a judge found probable cause to try him for fraud.

 The fraud charge was filed by Nicaraguan Attorney General Julio Centeno Gomez
 after presidential aides discovered that Jarquin had paid a Nicaraguan television
 journalist $25,000 under a false name last year. About 60 other journalists were
 also on the comptroller's payroll under their real names.

 EUROPEAN FAVORITE

 Jarquin, the most prominent figure in the tiny Nicaraguan affiliate of the
 international Christian Democratic party, has long been a favorite of the European
 countries, which have never made any secret of their dislike for Aleman and his
 hardball conservatism.

 Publicly, Nicaraguan officials have been restrained in their response to the threat
 to cut off aid.

 ``It was the judicial branch, not the executive, that put Jarquin in jail, and if he's
 released, it will have to be the judicial branch that does it,'' said Foreign Minister
 Eduardo Montealegre. ``The same people who are always urging us to build a
 nation of laws in Nicaragua cannot turn around and tell us to violate the law, to
 interfere in the judicial process.''

 Privately, though, the government is furious that the Europeans, after demanding
 a series of austerity moves from Aleman that have been extremely unpopular in
 Nicaragua, are now holding the aid hostage while they take sides in a domestic
 political dispute.

 As comptroller general, Jarquin is a sort of free-lance investigator of government
 corruption, similar to the Government Accounting Office in the United States, but
 with broader powers. He was appointed to a six-year term by the Nicaraguan
 congress in early 1996, months before Aleman was elected president.

 POLITICAL ENEMIES

 The two men have been enemies since 1990, when Aleman won an upset victory
 over Jarquin and was elected mayor of Managua. As a city councilman, Jarquin
 repeatedly accused Aleman of stealing and misusing city funds, though none of
 the allegations were ever proven.

 Their feud intensified when Aleman became president. Jarquin has repeatedly
 accused Aleman's government of corruption -- but the evidence has often been
 thin, and sometimes flat wrong, as when a supposed $500 million embezzlement
 at the Central Bank turned out to be an accounting mistake.

 Meanwhile, Aleman claims that Jarquin has repeatedly ignored emerging evidence
 of scandals involving hundreds of millions of dollars in the 1990-1996 government
 of President Violeta Chamorro, his political patron.

 Aleman was able to turn the tables in March, when his aides discovered records
 showing that Jarquin had dozens of journalists on his office payroll. The payments
 also included $25,000 -- a staggering sum in a country where reporters make as
 little as $350 a month -- to a journalist named ``Ramon Parrales,'' whose resume
 turned out to be fictitious.

 Witnesses came forward to say that checks made out to ``Parrales'' had been
 cashed by Danilo Lacayo, host of a wildly popular and influential morning news
 program on Nicaragua's largest television station.

 AIDE'S DECEIT

 Jarquin has admitted that he knew the money was going to Lacayo, but argues
 that he committed no crime because he believed there really was a ``Ramon
 Parrales'' who worked for Lacayo. He was deceived by an aide who drew up the
 contract, Jarquin says. (That aide, Nestor Abaunza, was also jailed on fraud
 charges, along with Lacayo, who was fired from his television job.)

 Jarquin said he hired Lacayo ``to research corruption.'' Jarquin's aides are a little
 vague on exactly what research Lacayo was doing, but they say there's no
 question that the comptroller got his money's worth.

 ``Lacayo had us on his program whenever we asked,'' said one aide. ``And when
 our enemies were on, we could supply him with questions to ask. . . . You can
 question the morality of this, the ethics, even the good sense of it, but it wasn't
 illegal. He provided a real service in return for the money.''

 Jarquin's arrest, his aides say, was an act of political revenge by Aleman.