State chartered banks, desperate to combat the unlimited interest rates paid by money market funds, are beginning to offer competitive checking accounts--sometimes in defiance of federal banking law.

This grassroots movement escalates today in South Dakota, which becomes the first state to allow its state chartered banks to offer so-called Super NOW accounts.

These are interest-bearing checking accounts that pay 5 1/4 percent on the first $5,000 and market rates on balances over that amount.

South Dakota is consciously violating federal law that prohibits both national banks and state banks insured by the federal government from offering NOW accounts without an interest-rate ceiling.

The Federal Deposit Insurance Corp. has warned South Dakota banking Commissioner Charles Burke that it intends to crack down hard and fast on any bank that does so. Replied Burke, "We're itching for a court fight."

Burke is one of a new breed of state banking officials who say they are fed up with the unwillingness of federal regulators to free banks to compete head-on with money market funds and other financial services that have drained billions of dollars of customer savings from banks and thrift institutions. Bankers have given up on the Depository Institutions Deregulation Committee, which sets interest-rate ceilings.

They are also frustrated by the inactivity on Capitol Hill. Deregulation actions strengthening the banks' competitiveness won't move forward until savings and loans and mutual savings banks get aid from Congress, and thrift institutions wonder how many of them will be left by the time Congress gets around to acting.

The House passed an emergency aid bill last fall. The Senate, after many months of backstage maneuvering, may be ready to mark up a more comprehensive--and more controversial--bill next week. But then the House will have to hold more hearings before both sides go to conference.

State officials are infuriated by the Federal Savings and Loan Insurance Corp.'s policy of forced mergers, which is shrinking the industry, setting up a de facto interstate banking system as large out-of-state institutions take over failed S&Ls. The policy is opposed by S&L executives who are ousted in such mergers and, in some cases, by stockholders.

All of this has prompted an extraordinary protest at the state level, officials say. New Jersey's banking commissioner, Michael M. Horn, declared, "If more states do it, it will trigger the federal authorities to go along or Congress to do something. State banking departments have ceded their responsibility and authority to Washington . This is a movement to exert leadership, to create a more dynamic system."

New Jersey plans to apply next week to the DIDC for permission to authorize Super NOWs. Even if DIDC refuses--as it has done in the past--Horn said his state's banks will be allowed to go ahead. Horn has also proposed to allow New Jersey's thrift institutions to use so-called mark-to-market accounting. This system, which is not in accord with generally accepted accounting principles, would permit thrifts to mark down their assets to market value and amortize the losses over 40 years. The effect would be to boost their earnings and thereby avoid extinction through merger.

The U.S. League of Savings Associations has pushed the concept without notable success in Washington.

In Maryland, state-chartered savings and loans offer accounts that resemble money market funds, but don't violate federal law because the accounts are not federally insured.

In Georgia, state banks are scheduled to try a different twist: open accounts payable, which pay market rates on the entire balance, just as the money funds do. Again, an FDIC exemption would be necessary, but it hasn't been sought. "Normally we wouldn't get involved at this level," said Bob Moler, deputy commissioner of the Georgia Department of Banking and Finance. "But in response to the DIDC's inaction we just couldn't stand by any longer and let the money funds take it all."

Utah's commissioner of financial institutions will also ask for an FDIC exemption.