A Maryland physician has retired from the powerful state medical board that decides workers compensation claims, amid a controversy over his consulting work for Maryland's largest private employer.

Dr. J. Howard Franz, 65, served notice that he will retire, effective Jan. 1, in a letter delivered Tuesday to the office of Gov. Harry Hughes. Franz is one of three doctors on the state's Medical Board for Occupational Diseases, which decides the cases of hundreds of workers each year who seek state compensation because of job-related illnesses and injuries.

In addition to the part-time, paid state position and his private practice in Bel Air, Franz, a radiologist, has been a paid consultant to Bethlehem Steel, the state's largest private employer, for more than 20 years. Until recently, Franz also did consulting work for about 40 to 50 other companies, by his own estimate.

Franz has said that he disqualifies himself from the hearings in cases involving Bethlehem Steel workers, but that he does review those cases. Even in cases where a doctor has disqualified himself, the board's practice is to have all three members sign the final order.

Franz's industry ties have come under fire recently from some Bethlehem Steel workers in two lawsuits pending in federal court in Baltimore. One suit seeks to remove Franz from the state board because of his consulting ties to Bethlehem Steel. In the other, six workers ask $48 million in damages from the company, Franz and two doctors who are not on the state board for allegedly allowing the workers to be exposed to asbestos fibers that they assert caused lung disease. The defendants have denied any wrongdoing.

In announcing his retirement, Franz strongly denied any impropriety, but said the constant controversy was causing a severe strain on him and his family. His six-year term would have expired in 1985.

Reading yesterday from a copy of his letter of retirement, Franz said that his stepping aside "is occasioned by the desire by myself and my family to be free of the stress and demands" of the job and of having to respond to "irresponsible assertions."

"This has been very strainful on me," he said, adding that he has been advised by his lawyer not to comment on the specific allegations that have been made since the first suit was filed in federal district court in August.

In that suit, the six retired Bethlehem Steel workers assert that they developed the lung disease asbestosis because of their constant daily contact with asbestos, the tiny, microscopic slivers that can enter the lungs, cut off oxygen, and sometimes cause severe mutations such as clubbed fingernails and blue lips.

In their court papers, those workers charge that Franz and the doctors who are not on the board inspected their X-rays every year for about 20 years as part of the workers' routine physical examinations. According to the court papers, the workers are charging that the doctors must have seen the asbestos-related disease slowly developing in their bodies, but never warned them. Meanwhile, the papers say, the company continued to let them work in the potentially hazardous conditions.

Peter Angelos, an attorney for the workers, said yesterday, "We're pleased that he saw fit to remove himself. What effect it will have on the lawsuit for damages remains to be seen." Angelos said that the other lawsuit, calling for Franz's ouster from the board, is obviously moot with his retirement.

Since Franz is over 62 years of age, state law allows him to retire, instead of resign, from the $10,050-a-year job and still be eligible for a state pension. He has served on the board as an expert X-ray reader since 1973.