The Commerce Department has halted the processing, at least temporarily, of a $70 million loan guarantee to Phoenix Steel Corp., a French-controlled steel company operating in Delaware and Pennsylvania.

Rep. Doug Walgren (D-Pa.) had protested to Commerce Secretary Juanita Kreps that aiding a foreign company with such a guarantee backed by public money would put domestic producers at a disadvantage.

But spokesmen for the Economic-Development Administration (EDA) of Commerce said the loan guarantee was being held up not because of the French control, but because a section of the applicable law bars help where demand for the product involved is not expanding.

The guarantee was requested under a $500 million program authorized last year by Congress to prevent the closing of American steel facilities. Phoenix said that it needed the guarantee to preserve 1,600 current American jobs, and ultimately a total of 2-100 jobs if the company were to remain viable.

But under Section 702 of the guarantee legislation, EDA must find that it is not creating additional competition for existing producers. A week ago, EDA told the company that the guarantee could not meet the test set out in Section 702.

Phoenix has submitted new information in the hope of getting the loan guarantee process on track again. But although Commerce officials appear anxious to preserve the 1,600 jobs they doubt that the application will go through unless it is somehow shown that expansion of Phoenix's product line won't add to competitive pressures in the industry.

Phoenix Steel is a subsidiary of Creusot-Loire, the third largest French producer. The EDA fund was set up last year when the Carter administration sought to help the domestic industry by a variety of measures, including the steel reference price system.