It looks like regular milk and tastes like regular milk but there's one big difference: because of transportation costs, it's much cheaper for a dairy to produce.

In a time of spiraling food costs reconstituted milk -- a mixture of milk powder and water -- seems to some people like the perfect weapon against inflation. Consumer groups and no less a cost-cutter than Alfred Kahn, President Carter's anti-flation adviser, strongly endorse its use.

But there's one catch. For 15 years the Agriculture Department has enforced a regulation -- strongly suported by the dairy industry -- which says that reconstituted milk can't be sold for less than fluid milk, even though it's estimated to cost from 10 to 30 cents less per gallon.

Now the Community Nutrition Institute, a consumer group, has proposed amending the rules and the dairy industry has responded with a high-powered lobbying effort. Caught in the middle are officials of the Agriculture Department, who must choose between the conflicting interrests of two of its principal constituencies.

We've been threatened with lawsuits by both sides," says one high-ranking department offical, "so we must be doing something right."

Ellen Haas, director of the Community Nutrition Institute's consumer division, says ending the regulations would be "one small tangible way to fight inflation and help consumers -- particularly low-income consumers -- without hurting the dairy industry."

Dairy industry officials, however, say the consumer groups are oversimplifying a complex issue. In the long run, they say, eliminating the rule would cost consumers more because it would damage the milk supply system and lower farm income.

"This is an issue that those people (consumer advocates) are exploiting," says Patrick B. Healy, chief officer of the National Milk Producers Association.

USDA economists are working now on an analysis of the impact of the proposed changes on farmers as well as consumers.The analysis was ordered by Agriculture Secretary Bob Bergland, who will use it to justify calling -- or refusing to call -- a public hearing on the proposal.

The public hearing is necessary for the proposal to move forward through the rule-amending machinery. Consumer advocates have been writing letters, placing telephone calls and meeting personally with key officials as part of an intense lobbying crusade to get the hearing. Dairy farmers have been using the same tactics to prevent the hearing.

The debate has reached beyond the USDA offices, with consumers and farmers buttonholing members of Congress and White House officials. Both sides have written letters to Carter, urging him to "encourage" USDA officials to act properly.

"After all, this is an election year," said Tom Smith, research director at the Community Nutrition Institute.

The whole question emerged as an issue more than a year ago when Alfred Kahn, Carter's inflation adviser, assembled a group to examine food prices and recommend ways to reduce them. Among the things they looked at was reconstituted milk.

Dairies manufacture reconstituted milk the same way a consumer blends the powdered milk available at stores -- by combining water and powder. The reconstituted milk tastes better, however, because a dairy can add butter fat and use commercial blending equipment.

Because the powder costs less to transport to the dairy the reconstituted milk," Kahn promptly endorsed the idea.

For some time, however, the milk has been virtually unavailable so when his food group recommended the lifting of federal restrictions that "artifically raise the rice of reconstituted milk," Kahn promptly endorsed the idea.

The Community Nutrition Institute then picked up the proposal and filed a petition with the Agriculture Department requesting that the reconstituted milk price rules be repealed.

Since that petition was filed Aug. 23, 1979, about 125 groups have joined with the institute to push the change. Groups with petitions on file supporting the amendments include government offices, such as the Council on Wage and Price Stability, public interest organizations, such as Common Cause and the League of Women Voters, and a variety of others -- such as the Chicksaw Nation and "Everybody's Money Magazine."

Dairy farmers, meanwhile, have been using their federation newsletter to publicize the role of members of Congress in the controversy. One May issue featured comments by U.S. Sen. John Heinz (R-Pa.) and Rep. F. James Sensenbrenner (R-Wisc.) opposing the consumer amendments.

Another May issue reported testimony by director Healy before the House Agriculture Committee at hearings on the overall condition of American agriculture.Healy's comments included this assessment of the reconstituted milk issue:

"Let there be no mistake, the issue in this instance is much deeper than the status of reconstituted milk. The real issue at stake is the continued effectiveness of the classified pricing system . . . "

Consumers, on the other hand, characterize their proposal as an "asterisk in the immense regulatory scheme that has grown up around milk pricing during the past 40 years."

The two sides also differ on these points:

Impact in the marketplace. Dairy farmers say that any savings produced by the rule change would be swallowed up by middle men and never reach consumers. Moreover, the farmers say there would be no way to prevent dairies from selling reconstituted milk under the guise of the higher-priced regular fluid milk. Consumer groups say that federal auditors, who already audit dairy books on a regular basis, would prevent cheating like that.

Jurisdiction. Farmers say the reconstituted milk price rule reflects a Congressional mandate and can't be changed by USDA rulemakers.Consumers say the mandate on milk prices was enacted by Congress in 1949. They say the rule they want amended was added by USDA in the mid-1960s after hearings held at the request of the dairy industry.

Reconstituted milk was available in many parts of the nation, including the Washington area, prior to the adoption of the USDA price rule.

Tanya Roberts, a USDA economist who recently published a paper on reconstituted milk regulations, offered one example of the popularity of the less-expensive reconstituted milk products.

She said that orders for regular milk increased 35 percent in the Houston area immediately after the reconstituted milk price rule took effect.

The increase was particularly dramatic, she said, because of the timing. "It took place overnight, from the day rule changed to the next day."