At the Mid-Town Diner in Middletown, water is served up with the usual lunch-hour fare of cheeseburgers, country-fried steak or pork tenderloin and mashed potatoes. More often it comes dressed as iced tea, but the water itself is seldom a topic of conversation.

Except now. Ask people about the building moratorium imposed by the state two weeks ago in the Frederick County town and the talk turns to water and the growing number of housing developments that have hastened its shortage.

"When you stop building houses, you affect a lot of people -- everyone in this room, really," said George Beckett, 57, a contractor who pours concrete in some of the developments. He blames public officials for not making sure schools, roads, water and sewer have kept pace. "To me, it's somebody not doing the job right," he said.

Dave Montgomery, 52, a co-owner of the diner, said having more people means more customers. But as a former dairy farmer, Montgomery, of Urbana, thinks the town needs to slow development before the last pasture disappears from Middletown Valley.

"I think most people who come in here agree with the moratorium," he said.

While having lunch with her husband, Arvella Lutz, 74, a retired Middletown postal employee, said that the town has "just overdone it."

Kendl P. Philbrick, the Environment Department secretary, ordered the town to cease issuing building permits, saying the step was necessary to ensure that residents would have enough water should another drought occur. The town's burgess, John Miller, argues that state environmental officials have overestimated demand and have failed to consider residents' actual water use.

Nestled in the broad valley between Braddock Mountain and South Mountain just west of the city of Frederick, Middletown has been an inviting destination for people migrating to the fringes of the Washington area. Since 1972, the town has annexed more than 600 acres for residential development, including 289 acres in 1991 for the planned community of Glenbrook. The town had a population of 2,668 in the 2000 Census -- a jump of more than 50 percent from 1980.

For more than four years, Middletown has been haggling with the Maryland Department of the Environment over whether the water capacity was sufficient to allow more growth.

Town officials have filed an appeal over the latest edict and are scheduled to meet behind closed doors Aug. 5 to try to reach a compromise in a dispute that many see as one more sign that the politics of water are here to stay.

"What the West has been dealing with for half a century, we're just starting to see here," said Thomas A. Natelli, the Montgomery County-based developer of Glenbrook, which has been halted by the building moratorium.

Behind the clash is a little-publicized shift in recent years in how state environmental officials calculate the available supply of well water -- a change that caught Middletown and such other municipalities as Mount Airy, Hampstead and Taneytown off guard. Unlike Emmitsburg and Centreville, whose growth was curbed by the state after problems surfaced with their wastewater-treatment capacity, those other towns have been told that their formulas for calculating available water and future development are no longer applicable.

"At that time, the philosophy was: If you could find it, it was yours," said Gary Hardman, Taneytown's city manager.

The state now requires towns to calculate how much water can be withdrawn safely during a drought year in the watershed where the withdrawal occurs.

Matthew G. Pajerowski, chief of the water policy and security division in the Department of the Environment's Water Supply Program, said the policy has been in place since 1987. But he said improved technology and advanced science have shifted how the state measures how much water a municipality can draw from aquifers. In 1994, the state also began requiring municipalites to take into account possible drought instead of only average water use.

Environmental officials said Middletown already draws too much water from aquifers that are outside its control.

The amount of water available is based on the percentage of land owned or controlled in that watershed. In Middletown, water is pumped from wells in three watersheds. But the Hollow Creek Basin, whose aquifer supplies most of the town's water, is the least under its control. Under the new formula, the town is entitled to less water than it thought.

Many municipalities, including Middletown and Taneytown, planned growth around different assumptions of the water supply. So even though Middletown has been targeted for growth in the state's "smart growth" laws, it might not have enough groundwater capacity to support new development under the state's formula.

And that creates an unintended consequence: Builders who cannot build high-density development in Middletown because of the water crisis could go just outside town limits, where they do not need public water, and subdivide farmland, dotting the countryside with one house and one well per acre -- a classic definition of sprawl.

The town would be dealing with the impact of those new homes on its streets and nearby roads and in its crowded schools. Already, only 17 percent of the students in the town's three schools live within town limits, said Andrew J. Bowen, the town's administrator.

"They're damned if they do, and damned if they don't," Sen. David R. Brinkley (R-Frederick) said.

Caught in limbo are the developments of Glenbrook and Foxfield, ambitious planned communities that are not completed.

Middletown annexed 289 acres in 1991 for Glenbrook, which had received approval for 350 homes, including 140 townhouses, and the Hollow Creek Golf Course. The development is about half built.

Foxfield, a 300-home development led by Farhad Memarsadeghi, owner of Admar Custom Homes, is about 75 percent complete. Memarsadeghi said the moratorium's impact has been hardest on 12 buyers who sold their previous homes, put items in storage and moved into apartments waiting for their new homes.

"They are caught in the middle," he said, adding that laborers and contractors who committed to the project have no work now. "It's really devastating."

The crisis in Middletown came to a head in April when the town notified state environmental officials that it had issued 44 new building permits to ease the "substantial personal hardship" of these families.

Lori Benedetto and her husband, Tony, sold their home in New Hope, Pa., in September, relocated to Middletown, rented a tiny rambler outside town and expected to obtain the building permit in January. But the builder said late last year there would be a delay.

They wondered at times whether their new house would ever be built, even as they began to put down roots, and as one of their children started school. And if their home in Glenbrook didn't get built, they wondered what they would do next, since the hot housing market had priced them out of Middletown in the intervening period. After a delay, they received their building permit this spring. "I know what it's like not to know," Lori Benedetto said.

Middletown officials said they have attempted to comply with the state's new formula while also fulfilling obligations to developers. The town has searched for more water, and has enacted measures to regulate growth and water use.

In April 2003, for example, town officials adopted a law that reduced the number of building permits that could be issued each year to make sure growth kept pace with infrastructure. The town also arranged to use about 58,000 gallons daily of well water from the Hollow Creek Golf Course. In exchange, the town has agreed to provide the golf course with treated wastewater to water its course.

In what used to be the town post office -- and which before that was a bank, and before that was a church's parsonage -- Larry Palmer is cutting hair in his barbershop and talking about the influx of people who have clogged the roads, crowded the schools and driven up housing prices.

"I think the state's right. I think Middletown is overbuilt. When I was growing up, this used to be a rural community. Now we're a bedroom community. That's not what I want to see," said Palmer, 58, working a straight razor on a strop.

But the guy in the chair is one of the newcomers.

Staff researcher Bobbye Pratt contributed to this report.

A water spigot sign indicates "code blue," or normal water supply, for Middletown, where residents are reacting to the new, state-imposed moratorium on the town's growth.Middletown has been an inviting destination for new area residents, but for years the town has haggled with Maryland Department of the Environment over whether water capacity has been sufficient to allow for growth.