The Carter administration has avoided a legal showdown over its wage-price guidelines by conceding it probably lacks power to deny government contracts to major firms in the paper industry, a primary target of its early anti-inflation campaign.

A West Coast union of pulp and paper workers, which sued to bar the government from enforcing the guide-lines, interpreted the administration's concession as meaning that contract bargaining can now proceed "without fear of federal intervention."*tAs a result, the union declared victory and withdrew-at least for the time being.

Officials of the government's Council on Wage and Price Stability said the matter was under review and declined to comment. Other sources said the government's contract sanctions policy remains unchanged.

At issue, among other things, was whether the paper industry faced termination of government contracts if it agreed to wage-and-benefit settlements in excess of the administration's 7 percent wage guideline.

The union, the Association of Western Pulp and Paper Workers, contended that contract debarment amounts to mandatory controls and exceeds the president's authority to act.

But the government filed papers in a Portland, Ore., federal court last week indicating that at least 12 of 13 paper companies involved in negotiations with the AWPPW do not have any single government contract exceeding $5 million.

Although its actual regulations are open-ended, the administration has consistently said-and repeated again in court-that it intends to enforce the contract sanctions only for individual contracts of more than $5 million.

The union contended that the government had earlier led the companies to believe they were in danger of losing government contracts if they didn't meet the guidelines.

At a hearing last Friday in Portland, U.S. District Court Judge Robert Belloni refused to grant the union's request for a temporary order banning enforcement of the guidelines.

But he held the case open pending a hearing by the government's Council on Wage and Price Stability on whether the union, which is seeking wage increases of more than 10 percent a year for the next two years, is exempt from the 7 percent guideline.

The union said yesterday that it was withdrawing its request for a hearing "because CWPS, to avoid a legal challenge to its debarment program, has now declared in court that the AWPPW and the companies may bargain without fear of federal intervention . . ."

However, said the union's president, Farris Bryson, "should CWPS reverse its position one more time, we will renew our request for immediate judicial relief." Ronald Rosenberg, Washington counsel for the union, said the case is being kept open for that purpose.

"Since we have successfully exposed the cynical, fraudulent nature of CWPS's unlawful threats to debar government contractors who do not comply with its wage guidelines, we see no reason to participate in the costly hearing process CWPS proposes," said Rosenberg.

According to Lester A. Fettig, head of the Office of Federal Contract Compliance, about 500 companies could be affected by the government's plan to deny contracts of more than $5 million each to violators of the guidelines. A total of $32 billion to $33 billion a year in contract work is involved, he said.