NEW YORK (AP) _ Michael Milken on Tuesday denied paying off a mutual fund manager who had purchased Drexel Burnham Lambert Inc. junk bonds on behalf of her clients.

Milken, who is serving a 10-year prison sentence for securities-related crimes, testified as a defense witness in the trial of Patricia Ostrander, a former top portfolio manager at Fidelity Investments.

The government has long maintained that Milken set up lucrative equity partnerships to reward portfolio managers for purchasing Drexel junk bonds on behalf of their clients. The Ostrander case is the first jury test of that claim.

The charges against Ostrander stem from an investment she made in a partnership allegedly controlled by Milken to reward her personally for doing business with Drexel. Ostrander made nearly $750,000 from her $13,200 investment.

As a representative of Fidelity, the country's biggest mutual fund operator, Ostrander was a frequent buyer of Milken's junk bonds.

She denies the investment was a payback. Defense attorney Harry Manion said in opening arguments that she had no guarantee the investment would make a profit.

Milken, who was testifying under subpoena, said he first met Ostrander in the early 1970s and spoke to her frequently about investments.

He said Ostrander committed Fidelity around October 1985 to invest about $85 million in a takeover deal involving Storer Communications. About two months later, Milken said he mentioned to Ostrander that he had stock warrants in the Storer deal available if she wanted to invest personally.

''I told her there were some warrants available if she was interested in investing in the Storer transaction,'' Milken said.

He declined to characterize his talk with her as a recommendation.

''I would rather call it a suggestion,'' he said.

Asked several times if he offered the investment as a payoff or gratuity, Milken said, ''No.'' He also denied she had ever asked for anything.

Under an often prickly cross-examination by Assistant U.S. Attorney Kenneth Vianale, Milken refused to say he knew the stock warrants would skyrocket in value, even though he admitted holding about 80 percent of them himself.

''They had the potential to be valuable,'' was all he would concede.

Milken was to take the stand again when the trial resumed Wednesday morning.

The courtroom appearance was Milken's first as a defense witness. He was escorted by U.S. marshals from his Pleasanton, Calif., prison cell.

Milken, who is seeking a sentence reduction in return for his cooperating with the government, testified for prosecutors in May in the case of Alan Rosenthal, a close friend and former Drexel colleague.