Rep. Fernand St. Germain (D-R.I.) warned the banking industry and its regulators yesterday that passage this year of legislation permitting payment of interest on checking accounts will be in jeopardy unless they can agree to concentrate on it.

"The moment we start Christmas-greeting the issue, it's dead," said the chairman of the House Financial Institutions Subcommittee.

The need for quick action results from a federal appeals court decision last month saying that automatic transfer's between savings and checking account are illegal because they never have been authorized specifically by Congress.

The court gave the legislators until Dec. 31 to pass a bill before 3.5 million accounts with automatic transfer rights and about $9 billion in deposits become extinct.

Lawrence Connell, National Credit Union administrator, stressed that unless action is taken by Oct. 1, credit unions will have to begin dismantling their share draft programs-a type of interest-bearing checking account-at a possible a loss of $500 million to $2 billion in deposits.

Credit union customers stand to lose about $21 million in dividends if they put these funds into non-interest hearing checking accounts. Banks currently hold $378 billion in such accounts.

Robert H. Mckinney chairman of the Federal Home Loan Bank Board yesterday supported the St. Germain bill to extend interest-beaing checking accounts nationwide. He said New England's experience with these accounts shows they attract young customers-savings and loan customers tend to be middle-aged or old-and are cost effective. McKinney would like to incorporate overdraft authority in the bill but said he would forego it if it threatened passage.

The hearings continue today.