President-elect Ronald Reagan has chosen as his new Interior Department secretary the head of a conservative Colorado legal foundation that has spent most of its short life suing the department and fighting against privileges for minority groups.

James G. Watts, 42, president and chief legal officer of the Mountain States Legal Foundation in Denver, is expected to be named later this week along with the rest of the new Cabinet.

The nonprofit, tax-exempt foundation has been molded since its opening three years ago by Watt's personality and interests, according to those who work there.It was founded in 1977, Watt said, "to fight in the courts those bureaucrats and no-growth advocates who challenge individual liberties and economic freedoms."

Since then its 10 attorneys have made such arguments in court as the following:

Colorado public utilities are not social welfare agencies and should not be allowed to give rate breaks to the handicapped, the elderly or the poor.

The Phoenix, Ariz., school board can only spend tax money within the schools, and therefore a program through which it helps high school dropouts is illegal.

The departments of Agriculture and Interior do not have the delegated power they claim from Congress to restrict public access to federally owned lands -- in giving them wilderness protection, for example. Such restrictions can only be imposed by Congress directly.

Interior's Bureau of Land Management does not have the right to restrict grazing on what environmentalists say are overgrazed New Mexico public lands. One such set of restrictions is being challenged by 33 Mexican-American ranchers.

The Environmental Protection Agency has no constitutional right to withhold $301 million in federal aid to Colorado because the state lacks a required inspection program for auto emission controls.

The Occupational Safety and Health Administration should not be given warrants allowing it to inspect all businesses in a certain area but should be required to get specific warrants and notify each business first.

The deadline for approving the Equal Rights Amendment should not be extended.

An Oklahoma rancher fined $500 for spilling oil into a creek should not have to pay because federal authorities only discovered the violation when the rancher reported it and fining him violates his Fifth Amendment right against self-incrimination.

Colorado agencies should not be allowed to give special consideration to minority contractors because state law requires agencies to accept low bids.

Most of those cases are still in court. "They definitely reflect Watt's personality," said Beverly Kinard, director of the foundation's communications office.

Environmentalists were most unhappy at the news of Watt's prospective nomination.

"The appointment is disastrous," said William Turnage, director of the Wilderness Society. "It appears that Reagan is paying off his political debts to the right wing with the environmental issue."

Rafe Pomerance, director of Friends of the Earth, said he was "astounded at the prospect," since Watt has represented mainly "those who want to undo the careful systems of wilderness protection so long in the making."

No stranger to Washington or to strident criticism, Watt was a member of the Federal Power Commission when it decided to triple prices on "new" natural gas from 50 cents to $1.42 per thousand cubic feet in 1976. He had run into some opposition to his confirmation as commissioner in 1975, when it was disclosed that he had awarded two consulting contracts totaling $60,000 to a friend while he was deputy assistant interior secretary three years earlier.

Characteristically, Watt freely admitted to a Senate committee that he had made a serious error and had violated his own standards, but "when you're trying to get results, you go to people you know."

Some of the people Watt knows include Sen. Alan K. Simpson (R-Wyo.), whose father, former senator Milward Simpson, first brought Watt to Washington in 1962 as his legislative assistant. Watt, a Wyoming native, is "not a zealot but thoughtful and sharp. He won't rip up the West or bulldoze the place," said the younger Simpson. "He does believe in the concept of multiple use" for federally owned land, which means including development along with environmental protection.

Other friends of Watt's include the board members and contributors to the foundation's $1 million annual operating budget. They read like a Who's Who of western business: Joseph Coors, scion of the beer-brewing family, who helped found both Mountain States and Washington's conservative Heritage Foundation think tank; Karl Eller of the Combined Communications Co. of Phoenix; Ted Herman, president of Pacific Freeport Warehouse in Nevada and the new board chairman of Mountain States; J.A. Westman, president of Universal Industries Inc. of Albuquerque, N.M.; former representative Wayne Aspinall (D-Colo.), and officers or representatives of Burlington Northern, Union Pacific Corp., Kennecott Minerals Co., Boise Cascade Corp. and Mountain Bell, among others.

Transition team officials were not concerned with the strong environmentalist reaction to Watt. "Some of the people most outraged initially will be happily surprised at his management competence," said Richard Fairbanks of the natural resources section of the transition team.