CHARLOTTESVILLE, VA. — A CLUTTERED grotto beneath Peabody Hall on this venerable college campus seems an unlikely place to spawn a church-state fracas. Yet when the University of Virginia denied an evangelical magazine funds to join other student publications produced in this crowded room, the editor appealed the case all the way to the United States Supreme Court.
Now policies at the school designed by Thomas Jefferson, an architect of church-state separation, will be the focus of oral arguments in the high court March 1 that could alter the US government's strict position of ''neutrality'' in church-state issues.
Though Rosenberger v. University of Virginia is a modest case that centers on the use of a student activity fee, some legal scholars call it the most interesting one the court has taken this term.
It pits free-speech rights against the First Amendment's ''establishment'' clause that forbids state sponsorship of religion.
The case arose when Ronald Rosenberger, the founder of a Christian publication on campus, argued that it was unfair that his magazine was denied funds from a student activity fee while the funds were made available to Islamic and Jewish groups.
Behind Rosenberger's argument is a larger cultural question raised by many mainstream Christians: Has the Supreme Court's position of neutrality on church-state issues come to allow a pattern of religious discrimination?
Harvard Divinity School Dean Ronald Thiemann says that if the court is willing to ''rethink its position on the neutrality of religion,'' this would be the first case in 15 years ''to define a greater openness to the presence of religion in a public institution when religion is not a threat to the institution.''
The March 1 arguments will provide an unusual look at how opposing lawyers are trying to frame the case. William McConnell, Rosenberger's lawyer, will argue a church-state case that involves a possible infringement of the free exercise of religion. University of Virginia lawyer John Jeffries will frame the case as a funding issue of no great constitutional merit.
The publication ''Wide Awake'' was refused student activity fee funding in 1991, when a student committee decided that its proselytizing content and mission were not in keeping with a university board's guidelines.
A lower court agreed that Rosenberger's right of free speech had been harmed -- but said the university's effort to uphold the establishment clause overrode the free-speech argument. Since the famous Everson v. Board of Education in 1947, government neutrality toward religion -- a ''wall of separation'' between church and state -- has been the standard position.
But Rosenberger's lawyer would like to ease the strict standard, showing that the university is not compelled to deny such funding.
Jeffries will argue that while the university's funding guidelines do allow for cultural or educational literature on religion, they do not allow for religious exhortation. Wide Awake's stated purpose is to ''encourage students to consider what a personal relationship with Jesus Christ means.''
Mark Tushnet, a Georgetown University law professor, says the case may not be ruled on by the court as either an establishment case or a funding case. The court may decide it is a simple religious discrimination case. ''This would be a small victory for McConnell,'' he says, ''but not the victory he seeks.''
For some time the court has been unclear on religion's role in public life. Mainstream religious thinkers such as Yale University law professor Stephen Carter argue that neutrality has been used as a cover for hostility toward faith. Justice Sandra Day O'Conner has asked whether the court's neutrality has turned a blind eye to discriminatory behavior.
Harvard's Dr. Thiemann, who has spent the past five years writing on church-state issues, feels that the case hinges on the separately provided student activity fund. He argues the student fee is not a direct government or taxpayer subsidy, and thus withholding it from a particular group doesn't constitute discrimination.
The University of Virginia will argue that Islamic and Jewish groups are cultural, not exclusively religious. ''We have a religious studies department here,'' says Jeffries. ''That doesn't mean it advocates specific beliefs and teachings.''
EVEN so, a number of scholars say the line between what is cultural and what is religious is fuzzy.
One member of a Jewish law student group here worries that his own organization will now be denied funds. ''Regardless of the outcome of the case, all social interest groups will be affected,'' he says.
Down in the grotto below Peabody Hall, Ellen Riegel, editor of a conservative student monthly that was just denied funds because of its partisan content, laments that student-fee guidelines get interpreted in a biased manner. Her deputy editor David Kellogg sees both the Wide Awake case and their own recent loss of funds as a battle between ''political correctness and free speech.''