NEW YORK (AP) _ At $1,400, the blue '85 Olds Cutlass looked like a bargain to Diego Encalada. But after a few weeks behind the wheel he wound up behind bars, where he learned he'd been sold a stolen car - by the City of New York.

Encalada, 28, bought the vehicle in January at an auction of confiscated autos. Three months later he was arrested for possession of a stolen vehicle.

Although the sedan had 77,000 miles, ''it was the best car I had ever seen at an auction,'' said Encalada, who on Wednesday filed a $1 million lawsuit against the city for false arrest and lost earnings.

City marshals routinely auction off vehicles that have been seized from owners who chronically fail to pay traffic tickets. Part of the proceeds go to the Department of Transportation for the tickets.

Encalada said he planned to drive the car as a livery cab while he studied for the ministry. He joined a livery car association, installed a two-way radio and obtained the necessary plates, permits and insurance.

When he went to get keys made, however, the garage told him that the serial numbers on the car were wrong, and that it appeared to have passed through a chop shop, where stolen vehicles are reassembled. But Encalada said he checked back with the marshal, and was assured the vehicle was legitimate.

On April 1, he was stopped in Brooklyn by police and told the car was stolen.

At the police station, he said he showed the police documents proving he had bought the vehicle at a city auction. But he was jailed until his arraignment, about 27 hours after his arrest.

''I'm a religious man, and I had never been with people like the ones in my cell,'' he said through an interpreter in a telephone interview. ''Some were drunk. Some were trying to get in fights. Just awful.''

Encalada, who came to the United States from Equador eight years ago, said he felt disgraced at his church, where he had been allowed to park the car until he insured it. He said people at the livery service made fun of him, saying, '''Some Christian you are - you're a car thief.'''

The charges were dropped, but Encalada said he hasn't gotten the car or his money back, and he's been unable to borrow the money to buy another one. Instead of sending money back to relatives in Ecuador, he's had to borrow from relatives here.

Marshals normally check with the state Department of Motor Vehicles and the city to see if a car is stolen before they auction it off.

David Snyder, the marshal who presided over the auction in question, said he had made such a check and was told the Olds was not stolen. He said he had the records to prove it.