The Labor Department, ordered last year by Congress to review its controversial cotton dust control rules, reported yesterday that they are the "most cost-effective and flexible way to protect workers from brown lung disease."

As expected, the department's Occupational Safety and Health Administration rejected proposed alternatives as less satisfactory than its own rules, which were issued last year but delayed by a court order. The cotton industry is challenging them as too harsh, and the textile workers union contends they are too weak.

The controls, reflecting a compromise within the administration between regulators and inflation fighters, establish different dust limits for various phases of cotton production, with four years permitted to reach total compliance.

The OSHA report concluded that the controls will cost $655 million in capital expenditures by industry, compared with $6.4 billion under a union-backed proposal and $347 nillion under the least ambitious proposal considered.

It said the regulations would eliminate a minimum of 23.490 brown lung cases, compared with a range of 3.740 to 46.320 in the alternatives considered.

Thereport also rejected and alternative that would require use of respirators rather than engineering controls on emission of dust, a solution favored as less costly by some administration economists. The report concluded that respirators are generally useful only for temporary situations.

Despite OSHA's reluctance to make cost-benefit analyses of its regulations, the report put a $100,852 price tag on each case of brown lung disability, including lost earnings and direct medical expenses, for a total cost of $7.5 billion. Thus, "while the costs of compliance with the final OSHA standard are high," the report said, "they are more than offset by the benefits of the benefits of the regulation."

The report also rejected suggestions that the controls would materially affect inflation or the nation's trade balance.