ATLANTIC CITY, N.J. (AP) _ This city's reputation for corruption weakens its potential for economic and social growth, most observers agree in the wake of the latest scandal.

Last week's arrest of Mayor James Usry, six other city officials and several local business people was the fourth time out of six previous city administrations that the resort's leaders have been charged with corruption.

Usry was elected five years ago as a reformist candidate after his predecessor was implicated in an influence-peddling scandal and lost a recall election.

Once again, residents and business owners are embarrassed. Albert A. Marks Jr., a long-time civic leader and former director of the Miss America Pageant, remembers past attempts to reform the resort's government.

Changes are thwarted by provincial attitudes, he said.

''Atlantic City really needs help from the outside, but everyone in Atlantic City has a chip on their shoulder for the people who move to the suburbs,'' Marks said. ''Their attitude is, 'We are alone to ourselves.'

''A regional government would be ideal, but it's probably not going to happen,'' he said. ''So, it's going to take a mayoral candidate whose qualifications are so beyond anybody who has ever run before, and it's going to take a very aggressive city manager who is really experienced in running a hundred-million dollar business with billions of dollars in assets.''

The city's 11 casinos mostly report to state gaming regulators, but in matters of zoning and planning, the gaming halls must endure a city system often overwhelmed by the mammoth projects. Usry has often been accused of being an incompetent administrator.

In a statement issued by the Casino Association of New Jersey, the casinos suggested changes in government must be made.

Martin Danzinger, a former member of the state Casino Control Commission, said the city's deteriorated condition and its administrators' reputations probably deter potential investors.

In 1976, when gambling was legalized, gaming companies first rushed to Atlantic City ''because it was new,'' he said.

''Now, investors notice that the city has failed to develop many aspects of the schools, transportation and other social services,'' Danzinger said. ''The expansion of the airport and the talk of a new convention center - those are still being discussed after 10 years.

''That all negates interest by investors. They say they have better places to throw their money,'' he said.

Atlantic City has a lot going for it, geographically, observers say: a temperate seaside location just two hours away from the major metropolitan areas of New York and Philadelphia.

A dying city injected with millions of dollars in new tax revenues, such as Atlantic City, could be reborn, Danzinger said. Hartford, Pittsburgh and Baltimore are just some examples of cities that have successfully put on a new face.

''In those places, cities and governments work hand in hand,'' he said. ''When I pass through Atlantic City, much of what I see looks exactly the way it did 10 years ago, and that's largely the fault of city government.''

But James Hughes, a professor of urban policy and planning at Rutgers University, said the city suffers because ''the casinos internalize operations. Local merchants are certainly hurt.''

Casino money ''bypassed the poor of the city,'' said Hughes, co-author of a 1983 book titled ''The Atlantic City Gamble,'' a critical look at what legalized gambling did for the decaying resort.

Usry and 13 others were charged Thursday with bribery, conspiracy, influence peddling, official misconduct and other counts resulting primarily from an attempt to gain control of a lucrative Boardwalk electric cart business and an airport gift shop franchise.

The case now goes before a state grand jury. In the meantime, Usry and the others can still hold office.

Within hours after Usry's arrest, ''state takeover'' was on the minds of many. Legislation for an Atlantic City ''super agency'' has been proposed before, but never took off.

Marks believes the state must take over Atlantic City ''at least on an interim basis, to eliminate what I perceive will develop into a chaotic situation. It will psychologically calm things down.''