Officials of small chemical companies complained to a Senate subcommittee yesterday that they are being driven out of business by an 18-month-old law requiring them to test suspect chemicals before marketing them.

But a lawyer for the Environmental Defense Fund argued against a small-business exception to its rules, noting that a small company was responsible for producing the pesticide Kepone, which caused severe nervous disorders among chemical workers in recent years.

Jacqueline Warren told the subcommittee on environmental pollution that small companies have as great a responsibility as large ones to test chemicals before they are marketed.

Under the Toxic Substances Control Act, the Environmental Protection Agency can require extensive testing of 50 chemical substances each year. But a controversy has ensued over whether the law means that the EPA can require 50 different products to be tested or whether it can require 50 categories of chemicals to be tested.

The EPA says it can require 50 categories of chemicals to be tested; chemical companies argue that the EPA has interpreted the law too broadly.

"Testing requirements for broad categories of chemical substances could have a devastating impact on small companies, which may find a substantial part of their product lines subject to extensive tessting requiremnts," said Donald Ellison of Virginia Chemicals, Inc.

Ellison, who also represented 105 companies in the Synthetic Organic Chemical Manufacturers Association, said small companies would not be able to develop chemicals that are needed in low volume if those chemicals would be subject to tests.

"The profit margin on most newly developed chemicals is such that little toxicological and ecological testing can be undertaken before the cost of development becomes too high to justify the economic risks," he said.

Representatives of large chemical companies also challenged the number of chemicals that EPA has required to be tested, though they acknowledged extensive testing would present less of a financial problem for them than for small chemical companies.

"Our resources should be used on high-priority items," said Richard Heckert of the Manufacturing Chemists Association. "We should not waste time and money on overtesting."

Sen. Edmund Muskie (D-Maine) disagreed. "What would be the public attitude if we inadvertently let a toxic substance out? Who will pay?"

Chemical company officials also urged the subcommittee to change as EPA regulation that requires individual employes to notify the agency if they believe any of a company's chemicals to be injurious. The officials said the company, rather than the employe, should notify the agency.

But Warren responded that the regulation was designed to prevent companies from "burying" information about toxic substances "in a drawer somewhere."

In contrast to chemical company officials, who charged that EPA has been using more authority than Congress gave it, Warren said EPA has not been using enough authority.

She said the EPA did not take action in getting Tris-treated sleepwear off the market, even after a ban on further use of Tris, a chemical that may pose a cancer risk to humans. The chemical was used to make sleepwear flame-proof.

She also said the EPA has failed to require that decaying asbestos be replaced with another substance to insulate walls and ceilings.

"The EPA is not using its regulatory authority," Warren said. "It has become a neutral arbiter between the chemical industry and the environmental groups."