Conservationists describe Appalachia's Canaan Valley as a biological paradise of soggy bogs, cotton grass and white-tailed deer. Most local residents call the mountain valley a Godforsaken swamp.

A full-scale feud had been raging for seven years over that difference of opinion when James Watt, now secretary of the interior, first got involved. In 1977, while a member of the Federal Power Commission, Watt overruled his own staff, a commission review judge and a fervent army of conservationists and voted to grant a local utility conglomerate a license to build a dam on the valley's Blackwater River.

Conservationists complained that the resulting flood would destroy 7,000 acres of rare and unique wetlands. But officials of mountain-rich and revenue-poor Tucker County applauded the power project decision for the jobs and taxes it promised.

Now, four years and two lawsuits later, the only dams in this valley are those built by beaver. But another showdown appears to be approaching in what has become one of the most prolonged and intense battles ever fought over the issue of energy versus environment. Once again, James Watt is positioned to play a decisive role. And conservationists throughout the country are waiting to see how Watt handles the issue as an early measure of his environmental concern.

When President Reagan appointed Watt secretary of the interior in January, opponents of the power project were stunned. Interior had been one of their staunchest allies against the project. Under former secretary Cecil Andrus, Interior had joined in a lawsuit against the Federal Power Commission over its approval of the utility group's license.

The irony of having Watt at the head of the federal agency that is suing over a decision he helped make, is not lost on either side in this convoluted power struggle. Watt already has said he feels free to involve himself in issues in which he participated earlier as a public official.

Watt's record before assuming the job at Interior is graded by many conservationists on a scale ranging from poor to miserable. "If there ever was an example of sending a fox to guard the chicken coop, this is it," complains a wildlife biologist at West Virginia University who belongs to one of a coalition of 35 wildlife and conservation groups opposed to the power project.

But supporters of the project view Watt's role differently. "There is a new climate," says freshman U.S. Sen. Cleveland Benedict (R-W. Va.), who is optimistic that wildlife officials at Interior will have second thoughts about continuing to sue their new boss. "Who knows what might shake loose in the next three or four months?"

Watt said through a spokesman last week that he had not reached any position on the project as head of Interior. But he has already undercut a proposal made by Interior's fish and wilflife department to purchase the disputed valley acreage for a national wildlife refuge.

After Watt announced recently that no new funds would be available to buy parklands, some opponents of the dam conceded that Interior's support had been effectively lost.

As the second decade of lawsuits and ill will begins, the valley's flora and fauna continue to enjoy squatters' rights. And the beauty of Canaan, a canoe-shaped valley 14 miles long, three miles wide and ridged by three Allegheny mountains 180 miles west of Washington, continues to lie in the eyes and attitudes of its contrary beholders.

"Once you've taken a walk through this valley you just can't help but love it," says Linda Elkinton, 34, a fifth generation daughter of Canaan Valley who has led the local opposition to the dam since 1970. During that decade of organizing, distributing pamphlets and lobbying, Elkinton says she was first shunned by neighbors, then harassed with threatening phone calls and finally intimidated enough a few years ago to move from the valley to Morgantown, 80 miles north of the valley.

"I feared for the safety of my family," says Elkinton, a short, blond-haired woman described by friends and foes as hardheaded and tireless. "I would never forgive myself if I haven't done as much as I could to save this valley."

Elkinton admits she holds the minority opinion in Tucker County, which is ranked by state labor officials as the fifth poorest of West Virginia's 55 counties according to income.

"It is really disgusting to sit here and try and stretch [a budget of] $380,000," says Edward Supak, administrator for Tucker County and its 8,500 residents. "We need money for our school system, housing for the elderly . . . I just get very upset over the whole situation."

The Allegheny Power System, a conglomerate of three major utility companies serving more than one million customers in five states, estimates that its hydroelectric pump and storage project would generate more than $2 million annually in tax revenue for Tucker Company. Opponents argue that the figure would be closer to $700,000. In any case, the revenue would at least double the country's current tax rate.

In Davis, a town three miles west of the proposed dam site, the 800 citizens are also expecting to benefit substantially from the project and many are irritated that the promised windfall has been kept from them for the last 11 years.

"We're just in a dam bad situation," says Davis Mayor Martin L Cooper, who is known as "Red" for his hair color, although it long ago turned white. "Our police car is worn out, our trash compactor is worn out and the EPA has been on our tail to get some water and sewage here. If we lose that power project, I just don't know how in the hell we can keep the town of Davis going."

Cooper, who says he released the first pairs of beaver on the Blackwater River in 1926, lives in the southern half of Canaan Valley. The area contains cattle farms, a 5-year-old housing development, and one strip of gas stations and roadside stores. The northern half of the valley, which is owned primarily by Allegheny and is targeted for the reservoir, is a waterlogged home for wildlife normally found in West Virginia and vegetation that is rarely found south of Maine.

Just how rare that vegitation is, some of it left behind during the last ice age, has been the central issue in two lawsuits and a series of environmental studies that have cost the power company and taxpayers millions of dollars.

"To destroy this scientific, biologically and esthetically valuable ecosystem would be comparable to destroying a rare painting by one of the great masters," said Robert L. Smith, a wildlife biologist at West Virginia University, in testimony before the Federal Power Commission eight years ago.

Allegheny produced its own expert witnesses who testified that the vegetation in the valley, while unusual for West Virginia, was neither unique nor rare.

The power company conceded that damming the Blackwater River would damage downstream trout fishing, but argued that the creation of a 7,000-acre lake would attract boaters, campers and still-water fishermen.

In 1974, Interior came out in opposition to the project and suggested an alternative be developed that would not have such a "severe adverse impact" on the valley. The following year West Virginia's Department of Natural Resources also issued a report opposing the project, stating that it would result in "the destruction of the most unique wildlife habitats of the state."

The opinions, delivered to the Federal Power Commission, were supported by the commission's staff and commission review judge Jair S. Kaplan, who called the valley "a national treasure" and ruled that Allegheny should develop a hydroelectric facility in another location.

Despite those recommendations, the commission voted 2 to 1 in 1977 to grant Allegheny its license. Watt, in drafting the license, said the decision was "strongly influenced" by the fact that the valley had been "thoroughly exploited" at the beginning of this century by loggers who removed every stick of the red spruce forest that once covered the valley floor.

While opponents of the dam, including the Sierra Club, the West Virginia Highlands Conservancy and the Interior Department, filed suit over the license, Allegheny went to the Army Corps of Engineers seeking a dredge and fill permit for the dam. In 1978 the Corps rejected the permit request, provoking a second lawsuit. Both suits are pending.

The power project as proposed would consist of the 7,000-acre valley reservoir created by a 65-foot high dam on the Blackwater River at a site pinched between the Canaan and Brown mountains. A second reservoir of 500 acres would be dug atop Cabin Mountain, 900 feet above the lower lake. During off-peak hours, such as nights and weekends, the water from the lower reservoir would be pumped to the upper reservoir through a pipe 30 feet in diameter and almost a mile long. During peak electrical demand, the upper water would be released through pipes to turn four giant generators.

While it has never become an issue in any of the lawsuits, opponents of the project argue that the lower reservoir is five times larger than necessary for a hydroelectric plant. The size happens to be perfect, however, for a nuclear power plant.

"We've always felt the reason the power company has pushed so hard for this project was to eventually get a nuclear power facility there," says an official of the West Virginia Department of Natural Resources. "But when you ask them about it, they say there are no plans at the present time. They don't tell you they'll never do it."

"There isn't any thought of a nuclear generating station there in the valley. None," says David Granger, a lawyer representing Allegheny. "I don't know how we're ever going to lay that nuclear thing to rest, it just stays around."

During the past two years there have been a number of alternate proposals offered for the valley, including one by West Virginia Gov. John D. Rockfeller IV. An early opponent of the project, Rockfeller says now he will support it if the power company will donate an unspecified amount of land in the valley to be used as a wildlife refuge.

Allegheny's lawyers have called Rockfeller's plan a "good one." But opponents of the dam disagree.

"There are alternatives to the power project, but there is only one Canaan Valley," says Steve Bradley, president of a Morgantown alliance of opposition groups. "This thing has been going on for more than 10 years. It may go on for another 10 years."

Dam supporters in Tucker County vow that they are prepared to fight their neighbors and conservationists to the end.

"We're not gonna give up," says Mayor Cooper. "We're not that type of people."