Schools Chief Resigns in N.Y. Budget Battle : Education: Chancellor said he refused to fire two staff members to avoid naming of fiscal monitor. Giuliani denies charge that he urged the firings.

The head of the nation’s largest school system, accusing New York’s Mayor Rudolph W. Giuliani of “nothing short of blackmail,” resigned suddenly Friday in what appeared to be a classic political struggle.

Schools Chancellor Ramon C. Cortines, in a bitter letter, announced that he would step down in June after Giuliani appointed a special monitor Friday to oversee the Board of Education’s budget.

New York’s new mayor, who faces a $2.3-billion budget deficit in the next fiscal year, had been pressuring Cortines to fire 2,500 administrators. He had called Cortines a captive of the board’s “bloated bureaucracy.”

But in his letter of resignation, Cortines, who served as San Francisco’s school superintendent before coming to New York last year, accused Giuliani of motives other than pure budget management and educational concerns in his appointment of former Rep. Herman Badillo (D-N.Y.), a Giuliani ally, to examine the school system’s finances. The city contributes more than $3 billion to the schools, Giuliani said.

“The appointment of the fiscal monitor was conditioned instead on my firing two senior staff members of the school system,” the chancellor charged. “They told me that if I fired them by noon, no fiscal monitor would be appointed. If I did not fire them, the fiscal monitor would be announced.

“It is very simple for me--my integrity is not for sale . . . “ Cortines declared. “Board of Education staff must be free to do their duty on behalf of New York City’s schoolchildren and the school system. Neither of these employees did anything other than defend the public schools.”

Neither of the employees was identified.

“I am frankly shocked that anyone in the mayor’s office would think that I would even consider firing anyone who was doing good work in good faith on behalf of the school system,” he said. “It is nothing short of blackmail, and obviously I could not succumb. It would have been morally wrong to do so.”

Giuliani and Cortines met last night to discuss budget cuts. At that meeting, Cortines charged, Giuliani and Deputy Mayor Peter Powers demanded the two staff terminations in return for not naming the fiscal overseer.

Cristyne Lategano, Giuliani’s press secretary, denied the charge. She said that the mayor had only suggested to Cortines that there were untrustworthy members of his staff and did not say who he had in mind.

Sources indicated, however, that particular unhappiness existed within the Giuliani administration over the employment by the chancellor of an assistant press secretary who reportedly had worked for former Mayor David N. Dinkins. Giuliani defeated Dinkins in a bitter election in November. These sources said that the former Dinkins appointee had been particularly critical of New York’s new Republican mayor as he discussed the school system’s budget position.

But Giuliani firmly denied Friday that Cortines had been urged to fire members of his senior staff.

“He is not telling the truth about it . . . “ Giuliani said.