Saying competition must be fostered in federal contracting, a federal judge on Friday rejected a legal challenge to plans by Bethesda-based Martin Marietta Corp. to bid on a $5 billion to $10 billion phone and data transmission network for the federal government.

American Telephone & Telegraph Co., which also is interested in the contract, went to court in July asking that Marietta's strategy be disqualified on grounds it would make illegal use of the seven Bell regional telephone companies.

The seven companies are barred from the long-distance phone business by the 1984 consent decree that created them out of the old AT&T monopoly network. But Marietta planned to use them as part of the long-distance network it would operate for the federal government, AT&T complained.

Marietta countered that the regional's facilities would be used under its direct control and only for about 40 percent of the long-distance traffic. Without them, it said, it would be unable to field a competitive bid.

U.S. District Judge Harold Greene, who sets much of the nation's telecommunications policy, rejected AT&T's plea. "In an effort to foster competition with respect to these huge contracts," Greene wrote in a ruling released Friday, "the court will simply issue a waiver."

At the same time, Greene reserved judgement on whether that waiver was necessary -- in other words, on whether Martin Marietta's plan violated the consent decree.

AT&T's motion was the latest obstacle to implementation of the planned update of the federal telecommunications network, known as FTS-2000. With a goal of providing telephone, data transmission and video services to federal agencies, it is expected to be the largest civilian contract ever let by the government.

Bids were supposed to have been opened in August. But the process was suspended because of congressional objections to plans by the General Services Administration to award the contract on a winner-take-all basis. Last month, GSA agreed to split the work between two teams of vendors, and the contracting process resumed, now a year behind schedule.

AT&T has formed a team with Boeing Co. Marietta, meanwhile, has joined forces with MCI Communications Corp. of Washington.

A third group, led by US Sprint, also was in the running for the contract but dropped out this summer. However, US Sprint officials have expressed interest in getting back in under the new two-vendor plan.

AT&T filed its motion against Marietta in July, after hearing in a speech of its competitor's plans to use the Baby Bells. In subsequent briefs with the court, the Department of Justice, the regional companies and Martin Marietta disputed AT&T's stance, contending either that Marietta's game plan did not violate the decree or should be allowed under a waiver.

Greene initially said that no decision was necessary, because it was not certain that the activity AT&T was objecting to would ever occur. But with all parties pressing for a decision, he issued one.

In a statement, AT&T described Greene's ruling as "a somewhat unusual resolution of the issue. "The judge is saying it would be all right for the regional telephone companies to provide the FTS-2000 switching under a waiver, without ruling on the larger issue of whether doing so violates the consent decree that broke up the Bell system," the company said. A spokesman said no decision had been made on whether to appeal.