The Bush Administration is considering the use of millions of caterpillars that feed on coca plants to destroy cocaine at its source in Peru and Bolivia, an official of the United States Department of Agriculture said today.

Waldemar Klassen, associate deputy administrator for the Agricultural Research Service, said the research to breed the inch-long malumbia caterpillar was part of an expanded project to develop new biological and chemical agents to use against sources of drugs.

The Bush Administration is asking Congress expand the financing for the research in the 1991 fiscal year to $6.5 million from $1.5 million. The project was first reported in Tuesday's issue of The Washington Post.

Mr. Klassen, who oversees the program, said the Bush Administration had consulted the two Andean governments about using such a tactic. ''The sense I have is that there isn't any discord over the malumbia,'' he said.