U.S. District Judge Harold H. Greene yesterday rejected a Justice Department request to bar local telephone companies from selling complex business telephone equipment once they split from the Bell System.

In a five-page decision, Greene refused to change his earlier order regarding Justice's landmark divestiture agreement with American Telephone & Telegraph Co. in which he said divested local companies must be allowed to sell telephone equipment to improve their financial health and to act as vigorous competitors with AT&T.

Last week, Justice had urged Greene to change his mind, arguing that local companies could use their monopoly over the maintenance and installation of local telephone service to keep competitors from gaining a foothold in their market if they were allowed to sell business telephone equipment.

Greene concluded yesterday that the divested local operating companies would be "unlikely to engage in this kind of behavior." As a result, he said it "would not be in the public interest" to impose the restriction Justice wanted.

Greene directed AT&T and the Justice Department to revise their historic Jan. 8 agreement according to the changes he ordered 13 days ago by no later than this Thursday -- at which time he would "promptly approve and enter [it] on the court record."

Justice and AT&T officials began meeting yesterday afternoon to complete the final agreement for Greene's signature, with both sides saying it was possible that the agreement could be submitted to the judge as early as today. Both sides had said last week that they would sign the agreement, as ordered by Greene, no matter how he ruled on the Justice Department request.

Signing of the agreement will set the stage for the largest corporate divestiture in U.S. history, with AT&T spinning off its 22 wholly owned local telephone companies -- which account for about two-thirds of its assets -- within the next 18 months. In return, AT&T will be allowed to enter the computer processing business from which it has been barred for the past 26 years. Additionally, the government's 8-year-old antitrust suit against the Bell System will be dismissed.

Greene approved the overall concept of divestiture in a decision Aug. 11, saying it was "plainly in the public interest." However, he said AT&T and Justice had to make several major changes in the divestiture plan to protect consumers and AT&T's competitors before he would sign the agreement. Among the changes he ordered was a revision to the plan to allow the divested local companies to sell telephone equipment.

In ruling against Justice's petition to drop that change, Greene said yesterday that although Justice and AT&T's competitors have acccused the Bell System of engaging in such discriminatory behavior in the past, the divested local companies "will be relatively small corporations with far fewer opportunities for anticompetitive conduct in [telephone equipment] than were available to the vast, nationwide, vertically integrated Bell System."

Additionally, the divested local companies will not have the incentive nor the ability to engage in anticompetitive conduct because they will be limited only to selling the equipment of other companies, Greene said.

What's more, he noted, "the type of anticompetitive activity which the government fears would be difficult to conceal" and could therefore be easily attacked by Justice and the local companies' competitors in future antitrust suits.

Greene also argued that the entrance of the local telephone companies into the equipment industry would serve "as a useful competitive check on AT&T," which otherwise would be selling the bulk of all telephone equipment.

"Naturally, we are disappointed that the judge didn't make the changes that we urged," said Ronald Carr, deputy assistant attorney general in Justice's antitrust division. "But we did say we would accept his revisions whether or not he ruled for us."

Greene's decision was greeted with mixed emotions in the equipment industry, with one major manufacturer, Rolm Corp., saying it was very unhappy with it because it did not protect competitors. Tandy Corp. -- the parent company of Radio Shack -- was very pleased, however, saying the decision will create a truly competitive market.