Milton Balkany, the longtime dean of girls school Bais Yaakov of Brooklyn, used the cash to pay off his credit cards, bankroll family-connected companies and reward other rabbis and Jewish organizations, the feds charge.

The 57-year-old Hasidic rabbi, who only two months ago was given the honor of leading the U.S. House of Representatives in prayer, faces up to 25 years in prison on four federal charges of theft, wire fraud, obstruction of justice and making false claims.

Manhattan U.S. Attorney Jim Comey said the rabbi "lined his own pockets" after obtaining the $700,000 through a congressional grant in 1999 from the Department of Housing and Urban Development.

Balkany, who has funneled more than $200,000 in donations to politicians including President Bush, Gov. Pataki, Sen. Charles Schumer and former Mayor Rudy Giuliani, told HUD officers the grant would be used to help pay off the school's mortgages.

But his alleged swindle has left the school in a perilous financial state after banks foreclosed on three mortgages totaling around $1 million, court documents said.

In the two months after receiving the cash, Balkany spent $500,000 writing more than 250 checks - but only $6,066 went to paying off one of the mortgages, held with HSBC Bank USA, the feds charge. Bankruptcy proceedings against the Orthodox Jewish school, which Balkany founded 35 years ago in Borough Park, have begun in Brooklyn Supreme Court.

Balkany wired $300,000 to an Israel-based company run by one of his sons-in-law and another $5,000 to an upstate import company presided over by another son-in-law, court documents say.

Nearly $16,000 allegedly went for paying off the rabbi's credit cards and he farmed out $82,925 to other friendly Brooklyn rabbis, synagogues and Jewish organizations, the feds charge.

Wearing a black yarmulke and prayer shawl, Balkany was stone-faced when he appeared briefly in Manhattan federal court after surrendering to federal agents at 8 a.m. yesterday.

After being released on $750,000 bail, he vowed to fight the charges, claiming the money was used to help his students.

"We will be able to demonstrate that not one penny was misappropriated," his lawyer Benjamin Brafman said. "He has a reputation for being scrupulously honest."

The feds also are investigating HUD grants totaling more than $2.7 million awarded to the school to construct a facility for disabled preschool children. Another grant application for $1.5 million has been suspended.

The rabbi's neighbors and political contacts couldn't believe it yesterday. "You put me in shock," a top political figure, who declined to be named, said after being told of Balkany's arrest.

A neighbor said the rabbi had spent much of his life "taking in people that are in need."

The arrest comes three years after Balkany was mired in controversy over revelations he helped win more than half the 12,000 day-care vouchers handed out by the Giuliani administration for Orthodox Jewish families. The rabbi raised so much money for politicians that Common Cause magazine once labeled him "The Brooklyn Bundler."

Additional reporting by Heidi Singer